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Archive for May, 2008

Is Microsoft Playing Possum for Yahoo? It Could Be Much Worse!

Posted by Bob Warfield on May 7, 2008

The prevailing wisdom is that Yahoo’s stock hasn’t totally cratered because Microsoft is simply being coy, and will inevitably be back after shareholders have made Yahoo management a little more pliable.

Personally, I’m not in that camp.  I think Yahoo fought so hard that Microsoft now views them as incompatible.  So what’s next in the Microsoft-Yahoo-Google love triangle?

Mike Arrington thinks Microsoft is just playing possum.  He writes recently of Gates’ apparent about face on strategy where he is no saying there’ll be no major acquisitions.  First, I would take that to mean they’re not looking at any at the moment.  But second, it made me think what that means for the Microsoft-Yahoo relationship if its true.  If Microsoft is determined to follow a go-it-alone strategy, how will they grow their search and advertising businesses?  It’s a safe bet they’re not suddenly going to hobble Google.  No, Microsoft has their own version of the scorched earth strategy. 

My bet is that it could be much worse for Yahoo than the investment community’s theory they’re just waiting to acquire them later.  The danger scenario for Yahoo is that Microsoft has decided the best approach is to spend up to the 40-odd billion bid taking all the market share they want away from Yahoo.

Why not?  Clearly Yahoo is in a severely weakened state.  Culturally, this is exactly what Microsoft has always done well.  Focusing all their energy on crushing the life out of a competitor is familiar ground.  And who wouldn’t want to view Yahoo as that competitior rather than try it against Google?

Even worse is that Google might actually decide they need to pursue a similar course.  Rather than let Microsoft have the share, they may feel they need to take it.

Tough position for Yahoo to be in, caught between those two giants.

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No sooner did I post this did I read that Microsoft has now approached Facebook to see if they’re interested.  As I say above, Microsoft is done with Yahoo.  They are very black and white about who is an enemy and who is a friend.  Once you’re an enemy, they stop at nothing to crush you.  This is how it starts.

Posted in Marketing, Web 2.0 | 3 Comments »

Another Chat With Concur’s Steve Singh

Posted by Bob Warfield on May 7, 2008

I just got off the phone with Steve Singh, CEO of SaaS Travel and Expense vendor Concur. 

I interviewed Steve last September, and he continues to be a very easy person to talk to, considering he is the CEO of one of the most successful SaaS vendors out there.  Phil Wainewright has taken to calling Concur one of the “four SaaS horsemen” alongside Salesforce, Taleo, and Omniture.  Those four are the largest pure play SaaS vendors out there at this point.  Singh’s style is very down to earth and self-deprecating.  He does not bash his competition, and genuinely values his customers and employees as you’ll see in the interview below.

Concur just turned in another great quarter of results that included tripling their net income year on year to $3.7 million, and increasing sales 74% to $53.6 million versus $30.8 million in the 2007 second quarter.  In light of this performance, customer acquisition was on my mind, so I this was the topic for our discussion.  Here’s how it went:

Steve, if I look at what I get the most questions about, and what would make for an itneresting read for my audience, it would be around the area of customer acquisition.  people really want to understand what works and what doesn’t in the SaaS world.  As I look at Concur versus your peers, you seem to be able to grow more while spending relatively less on sales and marketing.  Help us to understand what Concur does differently?

We deliver a service that really works in this difficult environment.  I’m a big fan of Salesforce, Taleo, and Omniture.  There’s a good group of SaaS companies that’s starting to emerge from the pack and really show what’s possible and what the future will bring.

Our view is that it’s nto a question of valuing enterprise growth over earnings growth.  Both should increase and the question is the mix.  We look at every dollar invested as if it was our own personal money, and it is in some sense, because we’re all shareholders here.  We expect a return on those dollars invested.  We quantify that as every dollar invested going towards at least 25% topline growth and 100 basis points of improvement in the operating margins.

For example, I’m perfectly happy if we can’t grow at 25% (although so far we’ve always beaten that!) to reduce the growth rate and increase bottom line growth.  If we can grow better than 25%, we are still not willing to come off the goal of improving the operating margin for the year.

Can you give us an example of what you’re trading off there?

Well, one of the big differences between Salesforce, a company I have huge respect for, and Concur, is how much we each spend on Sales and Marketing.  They spend about 50% and we spend 26% or so.  We are much more efficient in that way.

This efficiency comes from a couple of different points.  A higher percentage of our quota carrying salesforce get to their quotas.  And, we spend less on brand marketing.  Our view is brand marketing is not the best use of dollars. 

My job is to win the customer by giving them a great value.  We deliver a better service than anayone else can offer at a better value equation.  Beacuse of that, we get a huge amount of business from existing customers referring prospects.

<The angle brackets signify my parenthetical remarks, not voiced to Steve.  The trade off between brand marketing versus focusing on the better value proposition is an interesting one.  Concur is certainly a lot quieter in the market than Salesforce.  Steve is quick to point out that there is no one formula and that he isn’t saying the other guys are wrong, he is just saying what’s worked at Concur.  One wonders how much of the brand marketing is reflective of CEO personality differences, market differences, or other unaccounted for factors.  One thing that is sure is that Concur is very efficient at gaining new business!  The remarks about quota are also interesting.  Most sales managers I’ve talked to have 1/3 of their people wildly beating quota, 1/3 under review to see if they can make it or need to move on, and 1/3 who are too new to be held accountable.  It sounds like Concur has changed those ratios somewhat.>

So what’s your go to market advantage?

Boy, we could look at that in terms of hosting operations, platform as a service, sales and marketing, or research and development. 

Let’s focus on sales and marketing

Okay, for Sales and Marketing we try to drive as much of the prospecting experience to the web as possible.  We give potential customers the ability to see the product.  We make sure they can learn about the service from the web, know what it costs, and understand the value generated.  We do as much of that online as possible. 

When our direct sales force actually speaks to the customer, that prospect is much more developed and educated about Concur than is true at other companies.

From there it is also very important how you price your services and the types of contracts you drive.  We look at contract terms as moving closer and closer to 90 day or 1 year evergreen contracts.  A 3 to 5 year contract with cash up front is only reassuring for the vendor, not the customer.  Customes want you to be measured on quality every day.  Making that possible lowers the barrier for the customer.

Are those contract terms a differentiator?

<Singh chuckles>

We talked about that last time we chatted.  I don’t think of it as a differentiator because I expect that over time everyone will do this.  Why wouldn’t you make the vendor earn your business?  Vendors should make their contractual terms customer oriented.  Don’t collect the money up front.  This is a hinderance for many On-demand companeis.  They need to get to where there is literally no risk for the customer to move forward.

The next piece is that the quality of the service has to be so high that the retention rate is fantastic.  Our retention has been at 98% for 7 years now.  On our expense reports, literally 80% of the report is filled out automatically, so the end user experience is dramatically better.

When you chcuk out of a hotel, you have to break out all those numbers on the bill slipped under the door.  With Concur, we pull all that data from the hotel for you and populate it for you in your online expense report.  We already know every line item of detail–room rate, taxes, incidentals, whether you refueled your Hertz before turning it in or not.  You just use the service, and your experience is dramatically better.  That’s a positive feedback loop.

So when employees move to new companies, they ask for Concur.  One of the most satisfying experiences we have is watching controllers among our customers move to new companies, because they nearly always install Concur as one of the first prioriries on the new job.

<The focus on customer experience is fascinating.  There’ll be more on this theme in a bit, but you get the impression that Singh will spend a lot to improve that experience because it increases his sales.  That’s a very product and customer-centric focus, as opposed to using clever sales and marketing tactics to force more product into the market.>

Give us some examples of things you tried that didn’t work

<Loud chuckle>

Well the old perpetual license approach didn’t work!

We do invest a fair bit in going after different lead generation programs or different marketing and advertising programs that sometimes are wildly successful and sometimes are not.  We give our folks a lot of latitude to test and understand.  In all fairness, we push very aggressively on new functionality in the product.

Our customers give us a lot of requests for refinements.  For example, we’re announcing integration with RightCharge which improves our ground transportation integration.  You can book a taxi, shuttle, or town car and get it paid for and then populated on your expense report automatically.

I don’t want to come of sounding arrogant, but we haven’t had too many failures in all fairness.  Certainly nothing big.

<I wanted to follow up on his comment about testing and see whether Steve was a big believer in conducting tests and then doubling down on tests that worked well.  I didn’t get the impression he thinks that way>

Are you a test-oriented company?

We’re a company that’s very oriented towards giving our folks a lot of latitude.  The value of our business is entirely the people, like most technology companies.  These are incredibly bright people who have a great understanding of our customer’s needs and values.  We drive decisions down in the organization and have found that to be pretty low risk.

This manifests itself as something like Concur Imaging (Fax Imaging).  This feature happened because one individual 6 or 7 years ago hated pasting receipts on a piece of paper and mailing them off.  So, we added an 800 number you could fax your receipts to.  Customers loved it.  It improved the experience.  We kept on following our noses there and wanted to make that one step even better.  So we got a massive improvement from eliminating the paper receipts entirely.

There shouldn’t be any reason 2 years from now that you should fill out anything on your expense report.  It ought to be filled out for you.  We can do most of this today.  Use our booking tool to book travel.  It generates an itinerary, and you take your business trip.  As you take your trip, we get corporate card receipts every single night.  We match them to your itinerary.  As you check out of the hotel, drop off your car, we pull the receipts and match them back to the itinerary.  If they agree, your reprot is done for you.

Compare that to the experience of doing expense reports 7 years ago on Avery forms or Excel templates.

<At this point I began to get an idea of the competitive barriers to entry that were being erected throughout all this.  Concur has built up tons of partnerships to collect this data.  Conversely, if I have a choice to buy from a Concur partner and get my expense automatically handled or to choose someone else and have to rekey the data, guess which one I prefer?  We didn’t talk about this, but it’s a compelling story.

We were about out of time, so I lobbed in a last question about Sales 2.0.  There’s been a lot of discussion around this topic in the startup and VC world.  It means a lot of things to a lot of different people.  Mostly, it has to do with the view that old school sales models are too expensive in today’s world.  Companies pitching to investors need a story about why their sales will be more efficient.  I had the impression Steve hadn’t really heard too much about Sales 2.0, or didn’t put much stock in it, but his answer was interesting.>

What does Sales 2.0 mean for SaaS?

What do you mean by Sales 2.0?

It means a lot of things to a lot of people, but basically, it means making you sales process radically more efficient using the Web.  In the extreme, it may mean the end of feet on the street.

<The latter elicited a real chuckle>

The idea of the end of feet on the street is ridiculous.  It’s just not going to be that way, especially in larger deals with a significiant ongoing commitment.  We manage very sensitive data for our customers.  There is a relationship built on trust.  You can’t do that in a completely automated way.

I do think that you can do a lot more education over the web in a Sales 2.0 model.  That’s what Sales 2.0 has to be focused on.  Help the prospect understand what service you are delivering and the value proposition there.  At least a telephonic contact will be needed to close the deal.

You can drive greater efficiency.  ADP needed a couple thousand sales people to get 500 thousand customers.  You can do even better with Sales 2.0.

Anything else you’d like us to know?

The other piece from last quarter’s call is that not only do we see great demand in a difficult economic environment, but the travel and expense integration business has really taken off.

<Phew!  That was a high bandwidth half hour!  And thanks Steve, always a pleasure! >

My takeaways:

– Relentlessly improve your product or service to deliver the best user experience and ROI.

– Use a deep partner ecosystem to build competitive barriers, improve the experience further, and potentially create sales allies.

– Use the Web to educate prospective customers about the experience and the value.

– Follow up with great sales people to close the business.

My emphasis on “great sales people” is not just lip service (as in all sales people are great).  I’m keying off Steve’s mention that more of their people make quota than normal.  There’s some sort of focus on excellence there.

Posted in saas | 5 Comments »

Is There Still A Chasm?

Posted by Bob Warfield on May 6, 2008

An interesting post by Leigh has popped up on Techmeme.  She wonders, as I have, whether the fundamental notion of Moore’s Chasm has changed.  Leigh’s question is whether the generation that grew up on Technology still even thinks of it as early adoption, or if the behaviour has become so widespread that there really is no Chasm any longer.

It’s an interesting question, but I believe there will always be a Chasm of some sort.  My question is whether the Early Adopter crowd is now so large, and the Internet so effective at reaching them, that perhaps it is possible to build a business without the painful dislocation that is Crossing the Chasm.  Perhaps there are enough on the Early Adopter side to make a tidy business after all.

Posted in Marketing, strategy | 4 Comments »

Another Brilliant Scoble Linkbait: This Time on MSFT/YHOO/GOOG

Posted by Bob Warfield on May 5, 2008

I always enjoy Scoble’s linkbaiting.  It has to be one of the reasons he is a premier blogger about town. 

His latest purports to show that both Google (obvious) and Yahoo (What?!?!) are the winners and Microsoft is the loser.  His evidence?  A chart of stock prices since the deal was announced showing the performance of the three stocks.

Not so fast, though Scoble.  Of cources Google is up, but Microsoft and Yahoo are where they are on that chart for the same reason that Yahoo hasn’t crashed all the way back down to the $21 a share many investors say it’s worth absent Microsoft.  “And why is that?” you may ask.  Because a reasonably large contingent of investors are still betting that Microsoft will be back after shareholders soften up Yahoo management a bit.

I don’t think so.  As I pointed out in my original post, I think Ballmer and Co were hurt by how hard Yang and Yahooligans fought to avoid the embrace.  Ballmer extended what he saw as a generous offer and got back panicky scorched earth.  I mean come on, where’s the love in that?

I’m not the only one on that kick.  Henry Blodget says something strikingly similar:

Is Microsoft’s bid withdrawal just another bluff? It’s possible. Steve’s a card player, and he and his advisors probably foresaw the shareholder storm that is now walloping Yahoo–as well as the chance that this storm could be so intense that it could force Yahoo into a deal.

That said, we don’t think that’s why Ballmer walked. We think he walked because:

  1. His ceiling really was $34-ish, and it probably seemed that Yahoo just wasn’t going to get there.
  2. His enthusiasm for the deal had waned over the past two months–as many of his own shareholders, Yahoo management, and the press peed all over the combination.

In short, we think Steve walked because he just wasn’t that eager to do the deal anymore. And given Yahoo’s position since the bid was announced, we don’t blame him.

When the world figures out Microsoft isn’t coming back, or at least not at anything like that $33 offer, gravity will prevail and Scoble’s stock chart will look different.  Microsoft investors who think the deal was a mistake can heave a sigh of relief and raise that stock, and Yahoo will regress to where it had been, or worse.  Meanwhile, the one sure thing is that Google is likely to continue its rise.

Related Articles

Henning Kagerman says Ballmer should’ve upped his bid to get Yahoo.  That’s pretty rich.  When was the last time SAP offered a 70% premium for a company they wanted to acquire?  What would Kagerman’s response have been, I wonder, if his generous 70% offer had been spurned?

Posted in saas | Leave a Comment »

Apotheker’s 10X Operating Cost Reduction for SaaS Isn’t Enough

Posted by Bob Warfield on May 5, 2008

As I reported earlier, SAP is saying the delays in their SaaS offering are due to problems with operating costs.  Despite charging a very high price of $149 per seat month, Larry Dignan reports they still can’t make money on the offering.  According to Apotheker, they still haven’t achieved the 10x cost reduction they had targeted.

Here’s an unpleasant newsflash: even 10x is not enough to be competitive in the SaaS world.  As I’ve reported here before, the average SaaS player delivers its service more like 16x more cheaply than On-premises software.  If SAP is struggling to get to 10x, it may be quite a while before they’re fully competitive with the SaaS pure plays.

Cost to deliver is a huge competitive advantage for any organization.  Just ask Dell or Wallmart.

Related Articles

My colleagues at the Enteprrise Irregulars interviewed Henning Kagerman and came away with this:

There’s a very close link between the TCO of Business ByDesign and NetWeaver. The TCO is not so much hardware; There are too many processing steps in our hosting. We can continue to do manual steps when first upgrade Business ByDesign from 1.0 to 1.1, but it’s not predictable in way where every client got it at once and in the same way.

How many ways can I say that the cost reduction to be competitive in SaaS is a function of reducing the requirements for operations headcount and that it ain’t easy.  Real technology has to be purpose built for the SaaS world.  NetWeaver obviously was not.  Hopefully even the On-premises crowd will reap some benefits of these changes.


Posted in saas | 9 Comments »

Sun Sees Amazon Changes the Game Even for Hardware Vendors

Posted by Bob Warfield on May 5, 2008

The announcement that Sun has partnered with Amazon to make Open Solaris available on Amazon Web Services is fascinating.  It’s free, so Sun sees no revenue from it.  One wonders if Amazon has charged them for the inconvenience, so it may carry a cost.  In fact somebody somewhere paid a cost to at least cover the testing and development of whatever provisioning is required to get it started.  So why do it?

At the moment, Amazon is running away with the cloud computing show.  Last I heard there are over three hundred thousand developer accounts there.  It’s a thriving ecosystem, and if Amazon sold no more new customers, one has to suspect that just the growth centered around those existing customers would be significant.

Suddenly, this is a platform that matters for everyone that is trying to establish their own platform.  If you want your OS (Open Solaris) to have a chance, you’d better look into Amazon Web Services.  There is no Microsoft equivalent yet, so that’s a problem.  As I’ve said, Ballmer would’ve done better to buy Amazon than Yahoo, so perhaps now he’ll give that a try.  If you want your database or application server (hello Larry Ellison) to thrive, you’d better look into Amazon Web Services.  If you want your language (hello Python, Ruby is already there with Heroku) to be ubiquitious, you’d better look into Amazon Web Services.

In fact, as if to underscore this realization, the Amazon partnership is just one aspect of Sun’s official launch of Open Solaris.  But, it is a critical one.  It will be interesting to see how well it does, and whether there are aspects of the Cloud Computing world’s needs that give it any special advantages.  I’ve heard of a few things, but it hasn’t really sounded compellling so far (see Jason Perlow for more).  There’s an awful lot of momentum behind Linux already.

The availability of Amazon Machine Images does another thing.  These are freeze dried snapshots of a particular collection of software installed on a machine.  This makes them easy to propogate.  The best practice combination of various pieces of software can be combined, converted to an image, and made available for broad consumption.  This lowers operating costs and helps ensure that the “good” combinations are more prevalent in this ecosystem.

Sun’s announcement is a fasciniating indicator of just how important Amazon Web Services has become.  Look for more indicators as we go forward.

Posted in amazon, platforms, saas, strategy, Web 2.0 | 2 Comments »

What Now Yahoo? And What Now Microsoft? It’s Pretty Clear What Now Google…

Posted by Bob Warfield on May 5, 2008

By now you must have heard the news that Microsoft has walked away from the proposed marriage with Yahoo.  I got the first scoop on this from Michael Arrington.  Apparently Yahoo wanted $38 a share in the end and Microsoft would go no higher than $33.  That’s quite a gulf. 

Per Ballmer’s letter to Yang (which Microsoft themselves published), the Microsoft offer was a 62% premium to Yahoo’s stock initially, and rose to 70% later.  That’s a hefty premium: about twice the premium Oracle offered BEA, for example.

What’s next?

Yahoo’s response to the news focuses on the idea that, “The distraction of Microsoft’s unsolicited proposal is now behind us.”  Piffle.  The trouble is just beginning and that roar you hear is an oncoming freight train with the Yahoo bus stalled across the rails.

Scoble calls Yahoo, “a bleeding animal. Left lying, gasping for its breath, after a larger animal (Microsoft) struck and then walked away after it proved too difficult to eat.”  He goes on to list daunting challenges.  They’re mostly perception–perception that Yahoo is a wounded animal, perception inside and outside that Yahoo isn’t worth the $37 Yang asked for.  But perception counts at a time like this.  It’s very hard to rally the troops if they think the leadership did the wrong thing. 

The prevailing view is that lawsuits will fly, and it isn’t hard to see why.  Mathew Ingram flat out says, “Jerry Yang should be fired.”  He won’t be the first one to echo that sentiment, especially among shareholders.  Om Malik sees the offer withdrawal as Microsoft proving again that it is still the Prince Machiavelli of Technology.  The drama has proven that Yahoo has no real suitors to merge with and that its best option to remain independent is to give its online advertising to Google.  Surely that is a dreadful one-two combination for any company to face.

Fred Wilson, who thinks Yahoo did the right thingstarted a poll to vote on how low Yahoo’s stock would go Monday when the markets open again in the wake of this announcement.  His vote is for a close at $26, since he feels Microsoft has shown the real value of Yahoo.  I voted $20, because I don’t think Yahoo is worth what Microsoft bid to anyone but Microsoft, or perhaps Google, but the latter isn’t going to happen for anti-trust reasons.  As I write this, the poll is focused on the $20-24 range and there are more betting it’ll fall below $20 than that it will hit Fred’s $26 target.

Will the Google deal still go through?  Most pundits think Yahoo has to pursue it to placate shareholders by increasing profits.  Certainly Yahoo has talked up the efficacy of the trial to the point where it seems hard to back down.  If they do, one would expect their excuse will be the regulatory issues both they and Microsoft have alluded to that are involved with giving Google that much more of the business.  Meanwhile Yang, Filo, and the Board will face a barrage of shareholder lawsuits.  Hard to see how the shareholders lose either.  The premium that Microsoft offered sure seems like the sort of thing that fiduciary responsibility would have compelled them to take.  In retrospect, they will seem unforgivably greedy.

Microsoft is not without angst either.  There had been a story that Microsoft’s MVP’s were pushing to kill the deal.  That reflects a lack of faith in Ballmer, whose baby this deal was.  It can’t have been comfortable for him to back down, although it does let him play the, “I’m more reasonable than you thought, after all,” card.  Techcrunch goes so far as to suggest Ballmer might need to go.  As critical as I’ve been of Microsoft, and of this deal, that’s just ridiculous.  I’ll chalk it up to link bait, although if there’s not some progress made on the Vista debacle over time that may change.

I think something a little different went down here for Microsoft.  I suspect Ballmer and others at Microsoft were genuinely surprised that Yahoo would fight so hard to avoid being assimilated.  These guys love Microsoft, and basically grew up with it.  I know from a lot of friends that there is tremendous loyalty there–just as much as at places like Google.  So I suspect they were genuinely puzzled, and a little bit hurt that Yahoo would spurn them.  After all, Microsoft is a great home for Yahoo, which in their minds was stumbling badly, and they had given Yahoo an incredibly generous offer to go fight mutual enemy Google.  Couldn’t Yahoo see that Google was eating the industry up alive?

Many say that the Yahoo deal was set up to define Ballmer’s career.  Don’t forget–Ballmer’s had a career for years and years at Microsoft.  I doubt he sees this deal as career-defining as others may.  In fact, his walk away seems to me to be a great sign of a mature leader not willing to win at all cost.  It’s a great counter-example to the volatile reputation that he’s developed over the years.

Ballmer’s letter to employees leaves the door open to pursue other partnerships and investments to realize the competitive avantages that come with scale.  Don’t be surprised if there isn’t more news at some point.  My own personal suggestion was that Amazon would make a better acquisition than Yahoo for a variety of reasons.  After all, Microsoft wants to own the cloud, and Amazon is rapidly selling lots for builders there.  Also, Ballmer is all dressed up and left at the altar.  He’ll be looking for another big date.  Who will it be?  MySpace?  AOL?  Someone else with scale?  $44B goes a long way.  A stumble from Facebook and it could land in the spider’s web.

I’ll go firmly on the record as saying Microsoft, and Ballmer, did absolutely the right thing here, and Yahoo has badly erred.  I never liked the Yahoo deal to start because I don’t believe it offers real value.  The bloom has been off the Yahoo rose for some time, and the company is in decline.  The premium offered was generous, and it has been rejected.  Time to move on.

How do others benefit or suffer from this outcome?  You have to figure Steve Jobs and Eric Schmidt think it’s all good.  At worst Google can continue to take share from the weak and disorganized, and Apple need not fear a suddenly resurgent Microsoft.  At best, Google gets the deal to take Yahoo’s advertising and they win big.  I just don’t see how they can lose on this outcome.  Even if Microsoft comes back later to try again, Yahoo is badly mauled and unlikely to be anything but weaker by then.

Whatever else happens, if either Yahoo or Microsoft seriously stumble from here on out in their fight against Google, this event will go down in history as the day the two sealed their fates.

Related Articles

Amazing.  Here it is Monday morning and Yahoo has no announcement of an ad deal with Google nor any others news save vague platitudes from Yang.  The stock is getting hammered.  It’s epic and sad.

Meanwhile, guys like Jim Cramer (sorry, you have to pay to hear it, so I won’t give a link) have started ranting and raving about the hubris of Yahoo’s move to spurn Microsoft.  It’s going to get a lot worse!

Posted in strategy | 1 Comment »

SAP’s ByDesign SaaS Woes are Operational Costs

Posted by Bob Warfield on May 2, 2008

Interesting post just in from Joshua Greenbaum.  The world has been speculating on why SAP recently cut the budget for the Business By Design SaaS Product and delayed revenue targets for a year.  The answer, at least according to SaaS execs Hans-Peter Klaey and Jeff Stiles, is operational costs.

This is a classic because the inability to operate it cost effectively is a classical issue with those who stray from true multitenancy which SAP has.  It can be done, but you really need to think about how it’s going to work.

Shame on SAP for not thinking that far ahead.  It’s pretty basic to the SaaS equation.   Still, the ratios of Cost of Services are all over the map for SaaS companies.  If we look at Salesforce, NetSuite, Concur, Teleo, RightNow, and SuccessFactors, their numbers run in that order from 22%  (Salesforce delivers their service at the lowest cost) to 41% (SuccessFactors is the most expensive).

I’ve written about this in the past.  Given the typical $4 of annual IT cost per $1 of license on the perpetual model, SaaS companies need to gear up to operate their software 16X more efficiently than in-house IT.  Two observations:

–  That’s very hard to do.  Companies that keep telling themselves they’ll make it up in scale are kidding themselves.

–  It’s a big part of why companies buy SaaS.  IT simply can’t compete with a 16:1 cost advantage so most companies can save substantially with a switch to SaaS.

There are a lot of technological challenges to SaaS.  You won’t deliver a 16:1 advantage without building some real technology to automate the operations component of the software.  It simply can’t be done off the shelf.  It shows SAP is overly self-absorbed and not paying attention to what those ahead of them learned a long time ago.

This is just one more example of why it’s so hard for a big perpetual license behemoth like SAP to successfully sail into the shallow draft waters of the new SaaS world.  As Phil Wainewright points out, more nimble Native-SaaS competitors are well positioned to take advantage of SAP’s stumble.

Posted in saas | 5 Comments »

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