Thursday, October 09, 2008
Sequoia Capital Meeting: Our take on the economy and on-demand adoption
Chris Barbin
There's a lot of talk today about a meeting held earlier this week at Sequoia Capital, Appirio's lead backer, with the CEOs of their portfolio companies. The headlines grab your attention: Sequoia has emergency meeting, Sequoia sounds the alarm, Sequoia says to cut expenses now. The meeting was held in confidence, but we thought we'd share our perspective on the condition of the economy, what it means for Appirio, and, most importantly, what it means for customers considering the adoption of on-demand.Macro-economic conditions are critical for every business to consider. This is the time for the leader of any organization to take a sober look at their spending plans and chart a prudent path given the uncertainty in the economy. That's our approach at Appirio, and we recommend that all of our clients do the same.
What does this mean for the adoption of on-demand? While nothing is certain, we remain optimistic that very bad news for the traditional enterprise IT industry will be very good news for cloud computing, companies like Appirio, and customers who are adopting on-demand solutions.
Let's take a closer look at how the economic conditions are impacting one of the stalwarts of traditional enterprise software-- SAP. SAP announced this week that they experienced a "very sudden and unexpected drop in business activity" last month. The announcement led to a 12% decline in SAP's stock price. Here's how they explained the shortfall in revenue, and why we think things are different in on-demand:
- SAP customers faced difficulty financing upfront license fees. On-demand customers, on the other hand, pay for their solution as they use it. They don’t need to finance a big up-front investment in a monolithic solution with an uncertain business benefit.
- SAP customers balked at difficult-to-justify maintenance fees. On-demand customers, on the other hand, know what they are paying for — they see continual enhancements to their solutions without expensive upgrades or patches.
- SAP only learned of this in the final days of the quarter. On-demand customers, on the other hand, don’t need to engage in the edge-of-the-cliff negotiations with their technology vendors at the end of the quarter. These vendors know that they will only keep their customers for as long as they are able to create value, and need to be working every day to keep their customers happy.
It's striking that the very things that make current economic conditions so difficult for traditional enterprise technology vendors will drive customers towards adopting on-demand. Does that mean that spending in on-demand technology is counter-cyclical? It’s too early to say. But we have compared cloud computing to the Toyota Prius — an automobile that gets more popular as economic conditions worsen and gas gets more expensive.
Let's take an example: One of our customers built a business case comparing Microsoft to Google Apps for communication and collaboration. When they added up what they were spending on hardware, software, and people for on-premise software, storage, and backup, the total came to almost $700 per year for each of their 10,000 users. Switching to Google Apps saved this company $12M a year. Clinging to Microsoft Exchange is an expensive luxury, one that's going to be increasingly hard for CIOs to justify.
The average company spends 4-6% of revenue on IT-- for a customer at $1B in revenue, that is $40M - 60M in annual IT expense. Organizations that 'cloud-source' their IT infrastructure to on-demand providers can reduce this to 2-3%... a 50% reduction. This model provides cash critical in a down economy, and also provides executives flexibility and innovation that on-premise vendors cannot.
Despite these benefits, today SaaS represents only $10 billion of the $100 billion spent on enterprise software and $1 trillion spent on enterprise technology. It's easy to imagine dramatic declines in these traditional markets while SaaS and PaaS continue their rapid pace of growth. We've always believed that it was just a matter of time before SaaS moved from 10% of the market to 70%...CIO concerns over TCO amidst economic uncertainty could certainly catalyze this shift.
So in the midst of all the headlines, here's our message to you, our partners and customers:
Appirio is committed to helping our customers weather this storm. You’ll hear us talking more about the cost savings possible by moving your IT infrastructure to the cloud, and the rapid ROI possible from our custom application development. Creating real business value for our customers using on-demand technology remains our first priority.
Appirio is committed (as are our investors) to continued investment in our mission to accelerate the adoption of on-demand in the enterprise. We believe that this is a great time to develop new products, launch new service offerings, and enter new markets-- stay tuned to hear more.
Labels: CloudComputing, investors, Microsoft Exchange, SaaS, SAP, Sequoia-Capital, Software as a Service, VC
Thursday, August 28, 2008
Lawson CEO: "Traditional software is like cocaine — you're hooked"
Ryan Nichols
In a mind-numbing interview with ZDnet, Harry Debes, CEO of ERP vendor Lawson Software, demonstrates why the traditional enterprise software market is overdue for disruption. Debes' remarks show how little care and understanding legacy on-premise vendors have for their customers, and how poorly suited they are to help businesses address today's challenges. Is this really how traditional software executives view their customers?
Ordinarily, we'd ignore the musings of an executive whose company has destroyed massive shareholder value over the last 7 years - Lawson shares have lost nearly half their value since its IPO. But Debes' lack of awareness of the trends surrounding his market and the reality of what customers experience rivals that of telegraph executives trying to understand the implications of phones. Actually, Debes' cluelessness more brings to mind the infamous image of those cigarette CEOs telling the U.S. Congress that their products don't harm customers.
So here they are - Exhibits A, B, C, D, E, and F for why we founded Appirio, straight from the mouth of Lawson CEO Harry Debes:
"It isn't about locking people in. People lock themselves in. Traditional software is like cocaine — you're hooked. It's too difficult and expensive to switch providers once you've invested in one. If it were easier to jump ship, a lot of people would've hit the eject button on SAP a long time ago." In a moment of candor, the best comparison to on-premise software the Lawson CEO can think of is cocaine. Enough said. We'd laugh, until we'd remember what a painful drain this is on the productivity of real customers. The notion of lock-in was a central theme of why Appirio's first blog entry back in 2006 argued that every company must have an on-demand strategy.
"Getting signed up as a SaaS customer is fast, but getting out is just as fast." Switching costs are lower for SaaS applications. This key feature has fueled the massive customer interest in SaaS. But the biggest application switching costs have more to do with business change than what you're paying the vendor. Companies adapt their business processes based on what their software can do. The idea that SaaS vendors will see their customers switch month-to-month, chasing lower prices, is ridiculous. Vendors keep customers by demonstrating value. This may be a foreign concept to Debes, but the cornerstone of stable relationships in any field, business or personal, is mutual benefit to both parties - not addiction.
The reality is that Salesforce.com has much higher than average customer retention: 94% of its customers say they'd refer the company to a colleague, 74% of its customers say they have already done so. These figures are twice what most on-premise software vendors are seeing. SaaS solutions tend to be good because they have to be, to keep customers. On premise software can afford to treat customers as addicts - at least for the short-term, until the customers kick the habit for good.
"SaaS is just a financing option for the customer... This is something I've lived through three times: first it was called 'service bureaux', then 'application service providers', now 'SaaS'. But it's pretty much the same thing." Sorry, Mr. Debes, but you're wrong. SaaS is far more than a "financing option," and it's fundamentally different from the models that preceded it.
"People will realise the hype about SaaS companies has been overblown within the next two years....then, the rest of the SaaS industry will collapse. The hype is based on one company in the software industry having modest success... People are stupid."
So customers like Flextronics (200,000 SaaS users), Japan Post (45,000 SaaS users), and Wachovia (55,000 SaaS users) are stupid?In a mind-numbing interview with ZDnet, Harry Debes, CEO of ERP vendor Lawson Software, demonstrates why the traditional enterprise software market is overdue for disruption. Debes' remarks show how little care and understanding legacy on-premise vendors have for their customers, and how poorly suited they are to help businesses address today's challenges. Is this really how traditional software executives view their customers? Ordinarily, we'd ignore the musings of an executive whose company has destroyed massive shareholder value over the last 7 years - Lawson shares have lost nearly half their value since its IPO. But Debes' lack of awareness of the trends surrounding his market and the reality of what customers experience rivals that of telegraph executives trying to understand the implications of phones. Actually, Debes' cluelessness more brings to mind the infamous image of those cigarette CEOs telling the U.S. Congress that their products don't harm customers.
So here they are - Exhibits A, B, C, D, E, and F for why we founded Appirio, straight from the mouth of Lawson CEO Harry Debes:
"It isn't about locking people in. People lock themselves in. Traditional software is like cocaine — you're hooked. It's too difficult and expensive to switch providers once you've invested in one. If it were easier to jump ship, a lot of people would've hit the eject button on SAP a long time ago." In a moment of candor, the best comparison to on-premise software the Lawson CEO can think of is cocaine. Enough said. We'd laugh, until we'd remember what a painful drain this is on the productivity of real customers. The notion of lock-in was a central theme of why Appirio's first blog entry back in 2006 argued that every company must have an on-demand strategy.
"Getting signed up as a SaaS customer is fast, but getting out is just as fast." Switching costs are lower for SaaS applications. This key feature has fueled the massive customer interest in SaaS. But the biggest application switching costs have more to do with business change than what you're paying the vendor. Companies adapt their business processes based on what their software can do. The idea that SaaS vendors will see their customers switch month-to-month, chasing lower prices, is ridiculous. Vendors keep customers by demonstrating value. This may be a foreign concept to Debes, but the cornerstone of stable relationships in any field, business or personal, is mutual benefit to both parties - not addiction.
The reality is that Salesforce.com has much higher than average customer retention: 94% of its customers say they'd refer the company to a colleague, 74% of its customers say they have already done so. These figures are twice what most on-premise software vendors are seeing. SaaS solutions tend to be good because they have to be, to keep customers. On premise software can afford to treat customers as addicts - at least for the short-term, until the customers kick the habit for good.
"The success of Salesforce.com, in my opinion, has to do with their product being good, not because it's SaaS."
Salesforce.com is good BECAUSE it's SaaS. You can't separate the two! Consider the plight of a beleaguered Lawson product manager, trying to figure out how to improve the product. Invite a few customers into a lab and watch them work? Spend a day at a customer's office asking questions? Maybe they can peruse error reports "phoned home" by software to headquarters. The product manager then struggles to translate this anecodotal feedback into requirements, and plan the next release - which likely isn't for a year or two, since massive upgrade costs mean customers can't handle more frequent updates.
This process is a key bottleneck to the rate of innovation for on-premise software. It's nearly impossible to know if certain changes will make the product better or worse. The result - bloatware, as product managers add features based on what's going to look good on a feature sheet, without really knowing what customers will actually use.
Now look at the happy life of a SaaS product manager. After launching a new feature, they get immediate, direct feedback on real-life usage patterns. They see what works and what doesn't. They can even launch two versions of a feature to see which works better. Their development teams can fix problems instantly, without having to issue patches or service packs. In reality, early users of Salesforce.com would have had a hard time calling it a "good" CRM package when it was first released. But today, it is great. The rapid rate of improvement is a direct result of the SaaS model.
"SaaS is just a financing option for the customer... This is something I've lived through three times: first it was called 'service bureaux', then 'application service providers', now 'SaaS'. But it's pretty much the same thing." Sorry, Mr. Debes, but you're wrong. SaaS is far more than a "financing option," and it's fundamentally different from the models that preceded it.
- Economies of scale: The TCO benefits of SaaS go beyond the initial pricing model. There are real cost profile differences between a customer versus a vendor owning IT infrastructure. The benefits scale as SaaS grows. Google offers an online productivity suite for free, because the incremental cost to Google is near zero. Microsoft couldn't change this equation even if it gave Exchange and Sharepoint away for free, because a customer would still have to invest in the infrastructure required to run these on-premise applications.
- Multi-tenancy: The ASP "hosting" model was based on single tenancy - a separate copy of the server for each customer. By contrast, putting all customers onto the same code base gives the vendor economies of scale and allows them to deliver rapid innovation because they build on a single platform. Traditional software vendors wrestle with the nightmare of managing, enhancing, and testing multiple versions of their software, then porting everything to various hardware and OS stacks. Multi-tenancy virtually eliminates the single biggest cost to the customer in all of enterprise software - the dreaded upgrade. Salesforce.com and Google have released dozens of major releases without ever forcing their customer to re-implement, re-test or re-set their business processes.
"People will realise the hype about SaaS companies has been overblown within the next two years....then, the rest of the SaaS industry will collapse. The hype is based on one company in the software industry having modest success... People are stupid."
McKinsey reports that three-quarters of software buyers say they are "favorably disposed to adopting SaaS platforms" for software development and deployment, and that they will dedicate 19% of their total software budget to applications delivered as services this year. Are they stupid?
How about Silicon Valley venture capitalists? When's the last time you've seen them fund an on-premise software company? Are they all stupid?
Let's reflect for a moment on who is actually "stupid." Over the past five years, Salesforce.com shareholders have tripled their money, while Lawson shareholders have watched their shares under-perform the market. After reading Mr. Debes' interview, many may come to their senses and bring in a CEO who doesn't see himself as a cocaine dealer. After Debes remarks, the most interesting open question is who will file the first lawsuit, his shareholders or his customers...
Labels: investors, Lawson, on-demand, on-premise, SaaS
