How Big of an Issue Is SaaS Vendor Viability?

Ann All

Just as I was wrapping a story on companies at which most software applications are delivered as a service, a colleague sent me an item by ZDNet's Larry Dignan that echoes a point made by a couple of my interviewees, most clearly by Jeff Kaplan, managing director of IT consultancy THINKStrategies.

 

Predicting a "pretty gruesome shakeout" in the SaaS market in the coming months, thanks to the shaky economy and a proliferation of new SaaS vendors over the past 18 months, Kaplan told me:

Customers are becoming cognizant of the fact that they may need to select vendors who may not have best-of-breed solutions but who are the most financially viable ones out there.

Dignan cites a post in which Deal Architect Vinnie Mirchandani makes essentially the same point. He also shares Mirchandani's fix for the problem. Mirchandani says SaaS vendors should clearly communicate to customers how they can extract their data if they want to leave, provide solid back-up arrangements and require any acquirer to support service for at least five years. (The second item on that list sounds like a no-brainer, but consider the case of blogging platform JournalSpace, which lost all its data when a fired employee deleted the database on his way out the door.)

 

Yet Dignan doubts most SaaS vendors will take Mirchandani's advice. He writes:

Is a SaaS vendor -- or any other provider for that matter -- really going to talk bank covenants with customers?

The result, writes Dignan, is that big SaaS providers like Salesforce.com will benefit because of their existing track record. While that may be true, business has been suffering at even the largest SaaS companies, as I wrote last month.

 

Saugatuck Technology lists vendor viability and consolidation as one of its Five Key Issues for CIOs in 2009. The issue is of particular importance for those purchasing SaaS and/or Web 2.0 software. According to a B Eye Network article, Saugatuck predicts that at least 30 percent of SaaS and open source start-ups with annual subscription revenue streams of $5 million or less will fail by 2010, along with at least half of the companies focusing on enterprise social computing.


 

Ingres CIO Doug Harr, another of the folks I interviewed for my upcoming SaaS story, says that when done right, SaaS vendor consolidation can be a positive thing, "because you get more power behind the solution." Yet with SaaS, as with open source software, it's important to be confident of a vendor's viability. Says Harr:

On the open source side, we don't pick Joe's Open Source Solution. We look for vendors that have business-class solutions with full support behind it. At the end of the day, I'm happy to get free code, but when I am ready to put it into production, I want somebody to call at 2 a.m. if I need to.

(By the way, my SaaS story should appear soon on IT Business Edge. Look for it on the home page.)



Add Comment      Leave a comment on this blog post
Jan 6, 2009 6:20 AM Sam Higgins Sam Higgins  says:
Hi Ann - you make some good points, have you published a copy of the interview with Kaplan? I would be interested to see the whole thing.In my work marketing at StepStone Solutions, one of the only profitable vendors in our space (on-demand talent management software solutions) we have been trying to hammer home the financial stability point to prospects for some time. It seems like a fairly basic business case to make, but has until recently failed to hold much water. Hopefully financial due diligence will begin to take a more central role when making vendor selection decisions that carry such long term implications. Reply
Jan 12, 2009 2:52 AM Bill Bugbee Bill Bugbee  says:
Kaplan and Dignan miss the point singling out SasS providers. SaaS vendors are no more or less vulnerable to a market shakeout than their software vendor counterparts. In 2009 it is the financial stability of the customer base that matters to SaaS providers who are generally financially better positioned than their software vendor counterparts to weather operating expenses in uncertain times via a superior cash-flow model; including Reply
May 8, 2009 11:21 AM Sold on SaaS Sold on SaaS  says:

tenure does matter. as the SaaS market is threshed out, players who have been around for a while, for example HyperOffice, will see it play to their advantage.

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May 14, 2010 5:54 AM Heidi Wieland Heidi Wieland  says:

Agree with Bills point that both SaaS and software vendors were navigating through tough times. Shakeout is healthy and drives focus. Whats  key about the difference between SaaS and software vendors testing the SaaS model is experience with the model. SaaS companies like Salesforce.com, Successfactors, Netsuite, etc have a track record...And with the next wave of SaaS turning to IT Services, again, track record with SaaS is critical. NTRglobal on-demand IT automation and remote support with NTRadmin and NTRsupport SaaS has evolved and refined both the SaaS and hybrid cloud model for a decade. To learn more about NTRglobal SaaS for IT Systems Management, integration capabilities and partners, please visit www. NTRglobal.com or follow us @NTRglobal on Twitter.

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