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April 12, 2006


James  Governor

some UK innovation for a change - a company called smartfundit offers an online calculator to see how a packaged software company can smooth the transition to a SaaS company. The cool bit - it offers connections to VCs potentially willing to fund the transition.

check out smartfundit.com

funding as a service

disclaimer: they are a client

Yoav Shapira

Thoughtful, insightful, well-written entry. Thanks!

Rami Hamodah

As an on-demand CRM provider, I would have to agree with this article, but with some added notes:

- Upgrades to the SaaS model are more frequent and free, while on-premise are not. Take Microsoft for example, last year they had CRM 1.2, now they are releasing CRM 3. That will represent a 65% increase of license costs in less than 12 months.

- Software as a Service is actually less costly to produce, because of web standards available, look at writely.com for example, 3 man operation produced a SaaS word processing application that is actually better and more user friendly than Microsoft Office.
- The hosting of SaaS is not free, but it surely costs a lot less to host 10 servers for 1000 customers (SaaS) than to host 1000+ servers for 1000 customers (On-premise)
- There are so many types of businesses that will not benefit from on-demand solutions because of customer-sensitive information and government legislation ( I don’t think the FBI, or Bank of America will outsource enterprise applications to SaaS providers, therefore the End-of-Software slogan by Salesforce.com is just hype.

Also the risk for SaaS providers is greater since attrition rates can escalate if service is bad considering the ease in which customers can jump ship to other providers.

SaaS Follower

This comment is in response to Rami Hamodah's comment: "- There are so many types of businesses that will not benefit from on-demand solutions because of customer-sensitive information and government legislation ( I don’t think the FBI, or Bank of America will outsource enterprise applications to SaaS providers, therefore the End-of-Software slogan by Salesforce.com is just hype."

Here you are entirely wrong. To use your example against you, Bank of America pays millions for SaaS from Taleo (www.taleo.com) a pure-play SaaS vendor of talent management software. Taleo also has very large government organizations as customers greater in size than the FBI.

Do the research before you make such comments. As an on-demand CRM provider you have reason to be more optimistic about adoption of this model for large customers. Salesforce just closed a 6000+ user deal with Cisco. BusinessWeek also has a recent article with many more examples that prove this is not just hype:

Rami Hamodah

That is true. But what I was trying to say is that at all times some organizations will not outsource certain data to vendors in our space.

Talent Management is not the same as Bank Accounts information! The average customer of Salesforce.com has less than 19 seats, please do the math.

Don't you think I would be a lot happier if SaaS was the only way to go? That would increase my business by 10 folds! But the truth is, it is not there yet, and it will take at least 5 years for SaaS to have a 50% market share of enterprise applications.

Also recent outages of SFDC certainly make it harder for us to convince some customers that SaaS is the way to go.

John Martin

The "3-year breakeven" argument for SaaS is a myth: the on-premise cost doesn't include cost of the infrastructure (servers, database licenses, application server licenses) for multiple environments (devevelopment, test and production), installation and customization (often many times the license cost), and operations (DBAs/SysAdmins, maintenance costs on the infrastructure components).

If these things are included, there is no breakeven ever -- SaaS is perpetually less expensive than on-premise.

Plus, SaaS provides much higher value:
- Fast time to value (days/weeks instead of months)
- Ongoing free upgrades (rather than waiting several years to justify a costly upgrade project)
- Top-to-bottom support (how many times have you heard from an on-premise vendor "upgrade to our latest release" or "the issue is due to your customization"?)

So if you have an option between a SaaS solution and an on-premise solution, there's really no comparison.

Don Dodge

John, The three year break even analysis came from Jim Geisman president of MarketShare, a software pricing consultancy. He had a pretty detailed analysis of all the associated costs, which I didn't get into in my blog post.

But, you are probably right about the cost of hardware servers, DBA's and system admin people. These are huge costs that many companies have carried for years as a necessary part of doing business. Some of these costs could be avoided if they shifted to more SaaS applications.

The customization costs of traditional software are probably about the same for SaaS. Most companies have integration and customization needs regardless of the application. SaaS doesn't change that unless they have spent the extra development dollars to build in personalization, customization, and easy integration interfaces.

I agree that SaaS is a popular licensing and delivery model, and that the software industry is moving in that direction. However, there are issues to consider for both the customer and the software company.

Lloyd D Budd

Hi Don,

This is a very interesting topic to me, particularly as it can be applied to building open source software and selling it as a service. Thank you for your usual concise presentation.

What is meant by "Steady state business models"? And in the context of "require 15-18% for engineering and 30-35% for Sales and Marketing." Is that a percentage of total operating costs? And that compares to?

What are some other examples in the consumer and enterprise spheres of successes and failures?

Thank you,


Lloyd, Steady state means the normal run rate or "state" after the heavy investment in engineering for development and marketing for the product launch. Once those big investments are done you get to the steady state spending model.

The 15% for engineering and 30% for sales is a percentage of revenue. This is a good business model for enterprise software. Manufacturing businesses, or computer hardware businesses have very different spending models as a percentage of revenue.

Open source software is a great match for the SaaS delivery model. The development costs are lower so there is less pressure to generate big immediate revenues before the cash runs out. VCs expect a liquidity event within 5 years of initial investment, and they don't expect to put more cash in, so...the pressure is on to sell traditional up front licenses. SaaS is probably a better long term business model.

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