SaaS Model to "Collapse" According to Lawson CEO

I think you’re right about the viability of the SaaS model. While the adoption rate of SaaS as a delivery model varies across the spectrum of HCM products, there is no doubt that it is increasing overall. Getting SaaS right means hitting the tipping point between a one:many administration model that drives down the vendor’s operating expenses while simultaneously providing an appropriately configurable product to customers. Per your post, this requires investment – and is tricky for providers whose products are historically built for on premise deployment.

There was a time when people prognosticated that the mobile phone was just a hype and that it would never replace the desk phone. It are these same oracles (excusez moi le mot) who today pretend that the licensed software model is here to stay and that there is no future for SaaS. And we all know what is happening to the desk phone/landline model. Face it guys, you’ve made good money on licensed software, no problem with that, but you ‘forgot’ to invest in a successor. I appreciate that it’s hard waking up to reality.

“I think there is a world market for maybe five computers.”
- Thomas Watson, chairman of IBM, 1943

“One day Salesforce.com will not deliver its growth projections”

That statement alone shows that he just doesn’t get it. The fact that SaaS companies are insulated from the “run around and give away some business at the end of the quarter to make our number” effect is one reason that it’s such an attractive business model. If he better understood the SaaS concept of a steady stream of cash and mountains of deferred revenue, both he and his investors might be able to sleep much better at night.

Interestingly, here are the facts from HR buyers based on some of our recent surveys on the Center of Excellence…

1) Software-as-as-Service is the preferred service delivery model for HR applications (34%)

2) Subscription-Based (paid per
employee, per month, everything
included) is the preferred payment model (23%)

3) Anticipated use of Software-as-a-Service to… increase (54%)…decrease (3%).

I think the buyers are speaking!

[...] SaaS Model to "Collapse" According to Lawson CEO The problem with SaaS is that contemporary accounting processes penalize astonishing performance. Income recognition lags reality so badly that big successes like Salesforce appear to have mediocre results. The accounting process reduces valuation and punishes long term investment in R&D. The problem isn’t the model, it’s the accounting standards. [...]

Interesting article!

The flaw in Mr. Debes’ argument, I believe, is that he applies only a stock-market analysis viewpoint and assumes that only stock prices can drive IT service delivery paradigms. (He talks about salesforce.com being a mediocre player when it comes to financial returns and that they are the “only successful” SaaS player — not true, btw; look at Omniture, Concur, and Taleo.)

Yet we know this is not true. No one would dare call the client-server paradigm shift unsuccessful (even though it didn’t last forever) and that occurred at a time when the major player in promulgating it, PeopleSoft, wasn’t even a public company — they went public much later. We all know that paradigm shifts are driven by great and fundamental shifts in user/customer demand, not purely by what looks good in the financial pages. Fundamentally, the shift to SaaS is being fueled by two trends: (a.) the growth of ONE market segment more than any other — small and medium business, and (b.) the spectacular failure of the ERP vendors to make their suites, on an installed basis, accessible for that more budget-minded audience.

But I do like the part where, in response to questions, Mr. Debes calls all his customers and potential customers fundamentally “stupid.”

“Q: Won’t people avoid the mistakes of ‘previous’ SaaS incarnations?

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

And the part where he accuses Larry Ellison of founding Netsuite “by accident:”

“Q: But what about your competitors offering SaaS models?

A: [Oracle (ORCL) CEO] Larry Ellison has the same perspective as I do. He accidentally funded the CRM product and NetSuite (N). He didn’t really mean to…”

Appears that Harry and Lawson are missing out on the spotlight and will say just about anything to make news….???

Well, good for Mr. Debes for stating his opinions so clearly. This is what I love about business: we’ll see in 5 years where everybody is. I think he gets some details right (SF would have succeeded as a better on-premise CRM app alone) but having grown up in the enterprise world, I would never go back.

That said, SaaS does require a very different mindset at several levels in order to have a chance at success. When you develop an enterprise system that is going to get heavily modified by an implementation team, you can absorb a lot of customer-to-customer variations at that point, while to do SaaS right you need to know where things are going a lot earlier in the design process. While I think this leads to much more robust software for the client and a better innovation track for the vendor, it requires a level of thoughtfulness and design that is qualitatively harder to achieve.

As for his points about the ability of customers to switch rapidly, I think Jason’s comment above about buyer preferences tells the decisive side of the story.

Here is a quotation that Anshu used in one of his earlier blogs that best describes the current situation -
As Upton Sinclair said: “It is difficult to get a man to understand something when his salary depends on his not understanding it.”

I believe most of the previous comments have the correct perspective on why Mr. Debes feels the way he does. I’m more interested in what is obviously a PR Dept’s nightmare w/Harry: Calling people stupid AND equating his preferred s/w delivery model to cocaine. SaaS guys might want to carry this info w/them on sales calls to Lawson customers and prospects.

I was frankly shocked that not once in his interview did Mr. Debes focus on the potential benefits to customers from SaaS. And we all know what those can be: freedom for upgrades and patches, lack of yearly maintenance that may or may not be invested in their software.

Perhaps the question was never asked. But his entire focus seemed to be on whether SaaS was good for the vendor! Not the best position for a software CEO.

And I was amused by his mentioning four-and-a-years as the break-even point, since ADP (the original provider of hosted applications) has long admitted that after five years, customers would be better off — at least financially — to have purchased a perpetual license rather than paying ADP a monthly fee.

During the late 1990′s Customers of ASP providers also thought the model was a good one – until the ASPs all went broke and then the customers were left stranded. Business relationships are only enduring when they are win/win for both parties.

If it’s difficult or impossible for SaaS software companies to be profitable, then logically there are two possibilities:

1. The SaaS model is ultimately doomed; or
2. Some software companies will figure out how to get SaaS right, from a financial perspective.

The dot com period was also great for customers — cheap, VC-subsidized products and services available over the web. In the absence of a business model, however, it all went bust.

While I enjoyed Kozmo.com delivering cheap milk to my door, my high customer satisfaction didn’t make their business model viable in the long term.

Great to see Mr. Debes join the dialogue!

No question that we are going to need to see as much innovation around the sales, marketing, and delivery of Software as a Service as we’ve seen in the underlying technology…. this innovation will be required in order to make SaaS as economically attractive for the vendors as it currently is for customers.

But ASP 2.0? Not a chance. I tried to lay out a point-by-point rebuttal on our blog, would be interested in your response….

But one question: what were you thinking when you made the comparison between your enterprise software and cocaine?

It’s by no means ‘impossible’ for SaaS companies to be profitable or successful. But SaaS also will neither sell itself, or magically cure all ills.

There was a WSJ article just last week stating how SaaS companies are finding out that they face the same sales obstacles (and costs) that traditional software vendors face. And of course, without those big upfront license fees it’s a challenge to pay those expensive salespeople.

But the buyers are speaking and the genie’s out of the bottle. SaaS will succeed – although I wouldn’t go so far to say it will eliminate traditional software. There’s plenty of room in the market for both.

HCM Marketing Insider (above) makes a key point here that very few people want to discuss, that is, the fact that outside of SMB, SaaS adoption is relatively light. Furthermore, when people think of SaaS, they think only of the Salesforce.com model it seems. His other point, that the ERPs blew it is also true, but that’s another topic.

Why doesn’t anyone want to talk about the real issue? Which is, how can broad, large scale ERP type functionality be brought to large companies? SaaS must continue evolve in order to meet large scale needs. If most of the industry pundits and commentors had spent any serious time on an ERP implementation, they would understand exactly how demanding large companies are about their needs – out-of-the-box functionality just won’t do, despite how mnay best practises are embedded. See my related blog post at Customer Satisfaction via SaaS in HCM.

Furthermore, while I acknowledge that configurability will ultimately be the answer, the current crop of SaaS providers simply are not there yet. Workday seems to understand this, which is why I think they are taking their time.

Last, I know somebody out there will bring up Force.com as a rebuttal…I will tackle that one soon, because it is emphatically not the solution.

“outside of SMB, SaaS adoption is relatively light”

Depends on the application. Taleo has over 600 “enterprise” customers including 48 of the Fortune 100 (according to their post-Vurv acquisition press release). SuccessFactors and Kenexa don’t seem to release numbers breaking down their customers by size, but report 2100+ and 4000+ customers respectively.

HR and CRM only scratch the surface of what kinds of applications are required to run an enterprise. From where I sit, the biggest concern in adopting SaaS solutions is Information Security. SaaS vendors are burdened with investing in their own Information Security programs in order to meet the demand from their customers (which becomes evident during RFP).

Wow!! I would never even think of calling my customers or prospects stupid and that they are on cocaine?

What would Debes next call to be on the verge of collapse – social media?

I wonder if Debes has ever installed or had to deal with on-premise software upgrades – maybe he should try so that he can feel the pain his stupid, cocaine addicted customers have to go through.

Good point Jeff about Taleo’s customers. However, I think we are still lacking some data overall, since it is standard practise in the applications business to claim a Fortune 100 customer, even if you are only doing a small amount of business with a single division of a large company. Also, just as with SFA, recruiting solutions usually touch only a small subset of users within an organisation, unlike performance, learning, HR self-service applications. As to Kenexa, you can only count the Brass Ring cutomers to be fair. The outsourcing and content clientele is a different animal.

I would love to know the real numbers. It’s both a shame and suspicious that HCM vendors don’t fully disclose these numbers.

If people like Dale Jablonsky (CIO at the EDD) are interviewed recently as promoting SaaS to help get rid of millions of dollars of fraud, I think there is a great deal more to be learned/investigated into the ongoing competitive advantages of Saas, especially in light of the Public Sector’s typical cult-like addiction to legacy client server/enterprise apps.

The success of Saas, just like any software, is purely a function of the ability of the software to improve business and do it less expensively than the alternatives. If the total cost of ownership for a Saas solution is less than the total cost of ownership for installed software and all else is equal, then the Saas will probably win.

But, the real world just isn’t black & white like that. Just like anything there is not one solution to the problem. It all depends on the priorities of the business. One one hand, installed software/ERP has expensive upfront installation, licensing but less expensive ongoing costs over time. Saas has less expensive upfront costs but a larger cost over the life of the contract. It’s going to come down to what is a priority for each business and I think we see this in the tendency of the SMB to adopt the Saas model and the enterprise buyers still leaning toward installed software. That makes sense when you consider the enterprise has a scalable infrastructure that they’re probably already paying for (or actually already paid for years ago). They’re going to have difficulty justifying a subscription fee that includes systems infrastructure when they’re already paying for one inhouse.
Smaller business don’t have the upfront cash or infrastructure so they will definitely be wooed by the low cost of entry, even if it means paying more over the longterm. And, because they are growing at a more rapid pace, they place a premium on the flexibility that the Saas model provides.

I think we’ll see both models continue to exist, and the smartest (read that as successful) vendors will learn how to offer both models and seamlessly transition clients between them.

Over the long haul as the enterprise clients’ infrastructure becomes antiquated, adoption of Saas will probably become more prevalent but I don’t see that truly happening in most businesses for another 10 years.

I agree with Harry Debes that moving from on-premise to SaaS is difficult. If you do it correctly, you need to re-orient everything in the organization, not just the delivery mechanism. You actually apply the SaaS thinking to operations, development, support, marketing, legal and finance.

But that doesn’t mean you shouldn’t do what lots of customers are asking for, according to the KI research Jason referred to earlier. Talent management applications are a good fit for the SaaS model.

Besides the benefits of SaaS to customers, vendors gain advantages as well. For one, with a SaaS model, we can deliver new features more frequently and in more digestible pieces. I wouldn’t trade places with an on-premise vendor when they tell a customer that they’ll deliver a critical feature in the next release…18 months from now!

One data point for Techsphinx… for background for research I did for a performance management piece, I asked about on premise v. SaaS. The average installed figure for the industry turned out to be 83% SaaS, 17% on premise.

Thanks Lisa. Those numbers are what I would expect if you factor out partial performance rollouts from ERP’s, which are hard to find in surveys because they are buried in ERP HRIS rollouts, as well as custom solutions within larger organisations. Do you have a demographic spread?

Also, I would surmise that 50% plus of those numbers are SuccessFactors, primarily in the 500-2000 employee range. Like them or not, you cannot deny that SuccessFactors likely has an outright market share lead for now in performance. However, the market is still minimally pentrated overall, which leaves lots of room for others, like Tod above, and the ERPs.

TechSphinx, I think you vastly overestimate large organizations’ appetite for maintaining (and maintaining and maintaining) highly customized software implementations.

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

I agree with HR Maverick. We think that “on choice” deployment is the way to go. Why not let your customers choose the deployment model that best suits their business requirements, security considerations and IT capabilities – and change if they need to? We manage to deliver software updates effectively and efficiently to all our customers, on-demand and on-premise, in a regularly scheduled way. As to the viability and profitability of the SaaS business, we’ve been successfully selling SaaS for the last four years. It’s all about how you run your business, but more importantly about how you serve your customers.

[...] All Publicity Good Publicity? Thanks to Jason Corsello’s recent blog post, the HCM community is buzzing about some recent statements made by Harry Debes, our CEO, about the [...]

It’s my turn to weigh in — today’s post to my blog speaks for itself…and to say the very least, this dialogue has stimulated some interesting discussion. Jason, I’d be happy to keep you posted on how our position of ‘choice’ plays out in the market….it’s never dull!

I like Michael Krigsman’s comparison to the dot com boom, (I lived in San Francisco through that and saw it first hand – v interesting times) I think the problem here is that he is talking about the companies being overhyped and not profitable,

“People will realize the hype about SaaS companies has been overblown within the next two years.”

which may be true but that does not mean that SaaS itself will fail just many of the companies who do not get the financial model right and eventually customers will probably have to pay a little more.

In 1999 you could have said

“People will realize the hype about Inernet companies has been overblown within the next two years.”

You would have been right and many of those companies died – but the internet is doing just fine thanks.

I stumbled on this thread – and I think HR Maverick is correct:

If sufficient design flexibility is pushed into the SaaS using schemas, then the entire platform can be delivered for local install, at which point, the lines will blur.

[...] story is actually more profitable than Lawson is.  Jason Corsello adds that Lawson actually launched a SaaS offering last year, but experienced lackluster customer response largely to pricing and deployment issues [...]

Lawson quietly lowered guidance yesterday to Wall St. Financial analyst cite, “company-specific factors, including fiscal seasonality, sales attrition, lower than expected consulting productivity, and challenges with LWSN’s off-shoring efforts contributed to the miss”.

[...] Harry Debes recent comments on the impending death of [...]

I totally disagreed with Mr Debes and thought to myself… How can he be so “off”. Then I read his words and found the answer… He says SaaS ONLY companies. ADP (and its ilk) have had 40+ years to convert US business off of the most tactical in-house application in the back-office. That market has achieved a 35% share in that time with relatively flat growth. They now also sell perpetual licenses…Yes ADP. Now I agree with him on that point… Awesome discussion. Read critically though.

[...] Corsello adds that Lawson actually launched a SaaS offering last year, but experienced lackluster customer response largely to pricing and deployment issues [...]