How Big of an Issue Is SaaS Vendor Viability?

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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.)