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Look for SaaS Acquisitions in Near Future

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A coworker referred to my interview with Saugatuck Technology CEO Bill McNee, published on Friday, as "dense." That was a nice way of saying "wordy." Because McNee and I covered so much ground, the interview probably could have been split into two shorter parts. I don't think "dense" or "wordy" translate into boring, however. McNee's take on the enterprise software market, especially software-as-a-service, is well worth a read.

 

The major takeaway: While both traditional on-premise software and SaaS vendors have been hammered by the harsh economy, the on-premise guys have taken the hardest hit. Using two "market baskets" of five companies it created for both on-premise software and SaaS providers, Saugatuck saw top-line revenue growth of 3.7 percent and a contraction of 14.6 percent in new license revenues for the on-premise players. And that likely would have been worse, except for a relatively solid performance turned in by Oracle in its fiscal third quarter, McNee pointed out. (Oracle didn't fare as well in fiscal Q4.) Oracle and other on-premise vendors are collecting fees for maintenance and other services to help defray the decline in new license sales.

 

In contrast, SaaS companies saw top-line growth of 25.2 percent and deferred revenue growth of 18 percent. While this sounds pretty good, says McNee, it's way down from the growth levels of 40 percent or more enjoyed by most SaaS companies in the last year or two.

 

The good news, says McNee, is that field checks conducted by Saugatuck analysts in advance of more comprehensive research show signs of stabilization for both SaaS and on-premise software vendors in 2009's second quarter. Recent surveys by Computer Economics and CIO.com appear to bear this out, indicating the worst of IT budget cuts may be over. (Either that, or IT managers possess an optimistic streak. I think the former is more likely than the latter.)

 

When I asked McNee about strengths and weaknesses of both the SaaS and on-premise models, in this lousy economy and more generally, his answers point to an increasing likelihood of on-premise players acquiring SaaS companies to help them shift their businesses to a model in which they can offer their customers the best of both worlds. Thanks to their strong balance sheets, on-premise companies can afford to make these kinds of acquisitions. But they may not be ready to do so just yet. Says McNee:

 

The big question mark for on-premise players is if and when will large enterprises begin to migrate en masse to a SaaS model, not just for tactical solutions but toward core systems of record, such as financials, HR and ERP.

 

That simply hasn't happened yet, says McNee, but it will as SaaS capabilities continue to improve. As SaaS gets better, many enterprises are sitting on systems deployed in the late 1990s. At the very least, SaaS gives them more options to evaluate as they move into replacement cycles. Says McNee:

 

Saugatuck's opinion is that through 2010 we will not see not mass migration toward (SaaS delivery of) core systems of record, but things look much more interesting in the 2011-2014 timeframe.

 

Why not just develop their own SaaS offerings? Easier said than done, says McNee. Many on-premise software companies "either lack the funding or a full grasp of the changes necessary to move to a SaaS model."

 

McNee is hardly the only observer predicting that on-premise companies will acquire SaaS players. In a recent blog post, Sramana Mitra offers three companies, NetSuite, Citrix and SuccessFactors, as likely SaaS acquisitions for 2009, naming companies like IBM, HP, Oracle and SAP as possible buyers.

 

I wrote about the interesting possibility of BPO providers acquiring SaaS companies in late 2007. Such purchases would help them broaden and diversity their offerings and also reduce their reliance on manual processes.

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