• The title of “my biggest customer” has no clear winner these days. Most of the contenders are small DBMS vendors such as Netezza, DATAllegro, and EnterpriseDB. Generally, I’m closer to small companies these days than to big ones.
• That wasn’t always the case. For example, In other years my biggest customers have been Oracle (several times), SAP, Computer Associates, Microsoft (I think — if not so, then close to it), and AOL.
• I’ve had a falling-out with SAP, who flat-out cheated me in some business dealings. Multiple execs from the VP level on up seem to have been OK with that. If you think that SAP is more ethical than, say, Oracle or Microsoft, I strongly beg to differ.
• Every white paper and webcast I do is “sponsored”; i.e., money changes hands. (There may be occasional exceptions to that rule in the future, but it’s usually the case.) Sponsorship is clearly disclosed.
• I cannot commit to promptly or completely disclosing who my consulting clients are. Sometimes they want to be served in confidence. However, I always have disclosed — and in the future always will disclose — any kind of relationship in which I am paid to promote companies in any way.
• I do spot consulting for both public-equity and private-equity/venture capital investors. In other years I’ve also had a small number of retainer relationships with public-equity investors, but there don’t happen to be any at the moment.

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.

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)

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What makes this typical piece of SAP over-organization particularly amusing is that I didn’t actually attend the event. I was planning to, but after considerable effort I think I finally made it clear to VP of Analyst Relations Don Bulmer that I was fed up with being lied to* by him and his colleagues. In connection with that, we came to a mutual agreement, as it were, that I wouldn’t go.

*and lied about

Obviously, administrative ineptitude and dishonesty are two very different matters, united only by the fact that they both are characteristics of SAP, particularly its analyst relations group. Having said that, I should hasten to add that there are plenty of people at SAP I still trust. If Peter Zencke or Lothar Schubert tells me something, I expect it to be true. And it’s not just Germans; I feel the same way about Dan Rosenberg or Andrew Cabanski-Dunning, to name just a couple non-German SAP guys.

But I have to say this — both SAP’s ethics and its internal business processes are sufficiently screwed up as to cast doubt on SAP’s qualifications to “run the world’s best-run businesses.”

In the IBMOracle view, data — a.k.a. information — is king. IT’s job is to manage the data powerfully, reliably and (not always the top priority) cost-effectively. …

Microsoft’s vision, however, is quite different. It’s first and foremost about empowering people, at least to the extent that making them better corporate employees can be regarded as empowerment. …

While IBMOracle talks about information and Microsoft talks about people, SAP talks about business processes. …

Shortly after I wrote that, Microsoft came out with a sterling example of my claim. They told a story about composite apps. At SAP, composite apps are a business process story. At Oracle, they’re probably a business process story too. But at Microsoft? Read for yourself, in Microsoft’s own words:

The core vision behind what we are doing is Roles Based Productivity. To deliver on this vision, you have to start with “People” and really connect them up to their “work” (i.e. process). In the real world most people’s work is split across multiple applications and the “seams” show. Web Services is the foundational infrastructure that helps us get rid of the “seams”.

I don’t want to suggest I see something wrong with this. All three views are valid, and none of the vendors cited is too extreme (any more) about neglecting the other viewpoints. Still, I think this isn’t just semantics, but rather a fundamental difference in worldviews.