But as it self-identifies ever more as an application vendor, Oracle has also claimed to be more process-centric. And given the size of Oracle’s applications commitment, in this case I think the change, while not absolute, is at least in part pretty real.

We market our service to businesses on a subscription basis, primarily through our direct sales efforts and also indirectly through partners.

Looking back, I should have quoted that in support when I wrote:

By the way, I think the assumption SAP needs to sell ByDemand via indirect channels is an erroneous one. (Dennis Howlett seems to be at least partway to recognizing this. He also reports that SAP realizes that this is truly a sales issue.) Hence my stress on SAP’s internal sales management issues.

For 40+ years, application-oriented services have been sold in large part by direct sales forces. That goes back to the other payroll processors, and to time-sharing in general. Why would it change now?

2. The NetWeaver strategy has been failing. Does anybody care about NetWeaver any more? The whole thing includes some great ideas, but implementation has been lacking.

3. The Business Objects guys are proven successes at integrating disparate BI products suites. The Crystal Reports acquisition proved that.

Before writing more, I should check the extremely one-sided consulting contract I had with SAP, specifically for the expiration date of the NDA. How one-sided? Well, I naively agreed to a clause that I couldn’t sue them under the contract, expecting their concern about their reputation to keep them in line. Since then, they’ve cheated me out of considerable amounts of money that they owed. Arggh. Live and learn.

1. SAP sure has a lot of resources to bring to bear – and as previously noted, I think the company is dead serious about this initiative.

2. On the back end, the business-service granularity SAP has been implementing is well-suited to deal with the unique challenges of SaaS, both the very real (e.g., short upgrade cycles) and the largely imaginary (e.g., multi-tenancy).

3. SAP recently hired Dan Rosenberg away from Oracle to head its UI efforts, and Release 1 of a Dan Rosenberg user interface is likely to be very good. I know Dennis Howlett has a contrary view, and he’s actually seen the product. Even so, I’m optimistic about SAP’s claims to have designed the UI with an open mind, for maximum ease and simplicity, and validated by many rounds of testing.

As for sales and marketing – that’s a solvable problem. Indeed, SaaS and high-end packaged software can be synergistic businesses. True, a ByDemand salesman will need to earn much lower compensation than a high-end software sales team leader. But that’s a management challenge companies like SAP already know how to meet. Inside salespeople, product specialists, and so on can already tend to be compensated a lot less than the classic account-manager types are.

By the way, I think the assumption SAP needs to sell ByDemand via indirect channels is an erroneous one. (Dennis Howlett seems to be at least partway to recognizing this. He also reports that SAP realizes that this is truly a sales issue.) Hence my stress on SAP’s internal sales management issues.

All this assumes, of course, that SAP’s ethics and organization aren’t as screwed up as I sometimes fear.

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Technorati Tags: SAP, ByDemand, SaaS, software as a service, Peter Zencke, Dan Rosenberg

Salesforce.com is the biggest SaaS company. Salesforce.com is making next to no profit. Therefore, SaaS is currently not a profitable business.

But that’s nonsense. Here’s why.

If you look at Salesforce.com’s second quarter 10K, 6-month revenues were $339 million, up from $223 million the year before. Marketing and sales costs were $174 million, slightly over 50% of revenue. Profits were negligible. The company says the churn rate is negligible, so that 50% of revenue was spent increasing sales by 50%.

Now let’s suppose that the SaaS (Software as a Service) industry becomes more mature. 1% would no longer be a realistic churn rate. Let’s suppose it instead goes to 10%+, based on both true replacements and client disappearances. Let’s suppose the revenue growth rate settles down to somewhere in the teens. Bam. To a first approximation we can whack marketing and sales by a factor of 2, and take pretax margins well over 20%.

Of course, things aren’t really that simple. It’s also necessary to market and sell for customer retention. And true marketing cost (as opposed to sales) isn’t closely tied to the number of opportunities you have. But on the other hand, as you grow there are all kinds of economies of scale too. So to a second approximation, 25 – 40% pretax margins don’t seem unrealistic.

So how profitable can a recurring-revenue computer services company be? Two examples come to mind quickly – Automatic Data Processing and Paychex. ADP’s main business and Paychex’s whole business is services in the area of payroll processing and human resources. Paychex reported 39% pretax margins on its latest 10K, while ADP’s figure was in the 25% range. (Incidentally, it seems that ADP is a partner for ByDemand.)

ADP and Paychex actually tend to get much less revenue per client than, say, SAP’s ByDemand “please don’t call it ERP” system would, yet they manage to generate substantial levels of profitability. So even if we didn’t have the hard evidence from Salesforce.com cited above, it would be a good bet that nicely profitable business models exist for SaaS offerings sold to smaller clients.

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Technorati Tags: SaaS, Software as a Service, SAP, ByDemand, Paychex, Automatic Data Processing, Salesforce.com

]]> http://www.monashreport.com/2007/09/25/the-unprofitability-of-the-saas-business-is-an-illusion-caused-by-growth/feed/ 0 http://www.monashreport.com/2007/09/20/software-auf-probe/ http://www.monashreport.com/2007/09/20/software-auf-probe/#comments Thu, 20 Sep 2007 23:45:22 +0000 Curt Monash http://www.monashreport.com/2007/09/20/software-auf-probe/ We all know insulting wordplay such as “Windoze,” deserved or otherwise. (Personally, I prefer the more subtle “Intel giveth and Microsoft taketh away.”) I just learned one in German, however, that I’m guessing is less familiar to English-speaking readers. “Software auf Probe” translates, roughly, as “Software in test.” Any resemblances to long SAP adoption cycles are purely intentional.

Microsoft Office Word 2007 is, so far as I can tell, seriously flawed. Specifically, it has been eating way too much of my work for me to happily keep using it. This has been going on long enough that I’m convinced the cause is not simple user error. The final straw yesterday was when changes I’d saved in a draft blog post (about Filemaker) weren’t there five hours later, with no intervening crashes, no messages about “Do you want to close w/ unsaved changes?”, and so on. Naturally, Microsoft (or rather the excellent consultant/expert they’ve provided me to talk with) has never heard of these problems before and is highly perplexed. Anyhow, I plan to keep using Word for highly formatted work – i.e., white papers and Monash Letters – but using it for general note-taking and blogging has turned out to be quite the mistake. (I guess I could go back to Word 2003, but now I’m intrigued by testing the cheaper alternative.)

But all glitches notwithstanding — Office 2007’s “ribbon” is one of the five greatest general UI advances in the past 10-15 years*. Just as the traditional Office menu/icon-row look-and-feel dominates business computing, the ribbon is likely to soon take its place. And deservedly so, at least in two broad classes of application: Analytic and composite. And those two, taken together, happen to comprise the vast majority of the innovation going on in enterprise applications today.

*Three of the other four, in my opinion, are:

1. The screen-division aspect of dashboards and portals.
2. Dynamic text-link navigation, also popularized via portals.
3. Search boxes.

The last slot is left open for personal-taste additions to the list.

The ribbon seems designed to solve two major problems:

• People can’t easily remember or find their application options.
• Different options call for differently-sized widgets and icons.

And it does a bang-up job of addressing them. Take a look, if you haven’t already, and you’ll see what I mean. There’s no one big dramatic aspect to the ribbon; rather, it just frees UI designers from the shackles of making all icons the same size and all menus approximately the same length. Now think about how to design any kind of query/reporting/visualization/alerting application. Do you think that kind of UI flexibility might be useful? I sure do.

And the same goes for any kind of composite apps. The whole idea of a composite app is commonly to create an overall quick-and-dirty system that exits to pieces of functionality of disparate systems. And the ribbon UI is ideally suited for controlling the Frankensteinish result.

But the thing is — I think SAP’s overall technology roadmap has remained too incomplete. In essence — and I know some of my friends there will dispute this — SAP is still too focused on delivering software for how people should work, and doesn’t properly support the way they actually do — or realistically would like to — work.

Yes, it’s great that Dennis Moore and Dan Rosenberg are at SAP. But nobody — and this includes Shai — seems to be driving a real software re-think down into the individual products. The move to portal-based technology needs to be the beginning of the software functionality redesign, not the end. Josh Greenbaum thinks that Duet is all that and more, but I don’t see it that way.

*His other stated reasons include two very good and highly admirable ones – working on energy technologies and improving matters in Israel.

SAP’s technical strategy has three core elements:

1. Automate business processes.
2. Provide the technical infrastructure for automating business processes.
3. Encapsulate process and data at the object/process level.

This strategy has been heavily developed and refined on Shai’s watch, with major contributions from lots of other folks. The issue isn’t vision any more. What SAP needs to do better is execute on the vision.

The problem hasn’t exactly been technology implementation. Rather, it’s been technology implementation anybody cares about. SAP has a huge potential advantage in analytics due to its ability to integrate operational and analytical business processes. But has that gotten past the “potential” stage? Dennis Moore’s’ composite apps strategy is brilliant. But has it much affected anybody’s life? Meanwhile, application functionality is so mature that added development may have diminishing practical returns. So I have to ask: Just where exactly does SAP still have a significant product advantage?

SAP is doing plenty of things well enough to mine its massive installed base. But preserving and increasing the size of the base? For that, vision needs to be turned into more substance. And of senior SAP execs I’ve talked with and listened to — in Shai’s case mainly the latter — Shai wasn’t necessarily at the top of the substance list. Indeed, he’s the only one who routinely left me shaking my head about a gap between rhetoric and actual technological fact.

Bottom line: SAP may do better getting out from underneath Shai’s overarching decision-making.

Links:

• The official press release. (March, 2007)
• Some coverage of the Shai Agassi news. (March, 2007)
• My two-part take on SAP’s excellent architectural vision. (December, 2005)
• My overall view of SAP’s consistent strategic focus. (April, 2006)
• A white paper illustrating SAP’s erstwhile potential to dominate analytics. (November, 2004)
• The dark side of SAP. (January, 2007)
• My own take on future energy technology. (April, 2006)

Openwave will probably find a buyer at a decent price. Dave’s bad, but he doesn’t completely destroy companies; there should still be some value there.