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Are Changes Coming in the SaaS World?

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There is little agreement about where software-as-a-service is headed and what vendors in this space should do. Participants at a panel titled "Will The Next Salesforce.com Please Stand Up?" held at the AlwaysOn summit at Stanford University, had different views on these topics.

The panelists acknowledged that SaaS vendors are finding it difficult to penetrate the enterprise market, but had different theories on why this is so. Understandable, as they were all speaking from personal experience, either heading SaaS companies or, in one case, being a VC investing in SaaS firms.

One said SaaS players must provide disruptive change to customers if they want to grow, and that they should target the enterprise market because SMBs are not profitable enough. Others felt SaaS should remain targeted at SMBs.

SaaS vendors must offer new functionalities in order to succeed, Steve Papermaster, CEO of nGenera, which provides an on-demand platform powering the next generation enterprise, told the panel.

Moving traditional enterprise application functionalities to SaaS "changes your billing cycle, but doesn't change the game for the customer," Papermaster said. The breakthroughs will come from "inventing the next ERP instead of just providing accounts payable, accounts receivable, general ledger, inventory and other modules," he explained.

"If you're not providing disruptive change in the positive sense for customers so they can run and lead their business very differently from before, then you're not providing breakout value." Papermaster said.

Lyle Fong, CEO of Lithium, a SaaS provider of social media solutions to large enterprises like Dell (NASDAQ: DELL), AT&T (NYSE: T) and Salesforce.com (NYSE: CRM), agreed. The novelty of the SaaS approach is wearing thin, he said.

"Companies are accepting the fact that on-demand is no big deal, but they're not making the decision to get it, so vendors have to deliver additional values over and above the delivery mechanism," Fong told the panel.

Tien Tsuo, CEO of Zuora, which offers subscription services on demand, said SaaS vendors should focus on the service, not the technology. "SaaS is different from software in the same way that telecom services are different from telecommunications providers," he said. "SaaS companies should have a service mindset because businesses at the end of the day aren't looking for a component but for a solution."

Changes are coming, Papermaster thinks. The next wave of on demand technologies will be far more creative, and some vendors will offer breakout technologies, he said. This will lead them into "much bigger markets, with much bigger revenue earlier, and a much closer relationship with their customers," he added.

However Lisa Lambert, managing director of the software & solutions group at Intel Capital, which did about $1 billion in investments last year, said broad acceptance for SaaS "still isn't there." SaaS vendors still have not worked out issues around integration, security and other areas, she added, although Salesforce.com "led the way to validate that these issues aren't insurmountable."

It's a vicious circle: SaaS vendors can't sell to the enterprise because they haven't solved many of the concerns IT has with on demand software, so they don't try. Most SaaS vendors target the SMB market, while the rest aim "at niches in the enterprise such as human resources," Maynard Webb, CEO of virtual call center company LiveOps, told the panel.

That's not a sustainable approach, Papermaster said. "The customer acquisition rate is very high, customer turnover is costly, and I don't see margins at a sustainable 70 to 80 percent rate in many of the companies," he explained.

He recommended that SaaS vendors target large enterprises with "strong penetration, very, very deep functionality and offering very high payback for customers" because margins will be much larger there. "The issue is not so much one of 'is SaaS going to be acceptable to the enterprise,' it's rather how will it be possible for an enterprise not to run globally on demand?" Papermaster said.

"How do CEOs deal with the Net generation, which has hundreds of millions of people whose entire world is framed by on demand?" Papermaster asked. "They'll bounce and fall off if they get into any company that isn't available on demand and their experience doesn't match what they get out in the Web world."

Lithium's Fong said that while departments of large companies buy into SaaS "because there's an opportunity to buy faster, and bypass IT, which is a backlog," SaaS vendors encounter problems when trying to sell into the enterprise at large.

"Our package sells for five thousand a month and we still have to go through the same cycle a large vendor would - legal, IT, security, audits and so forth. Some enterprises still haven't figured out how to buy SaaS software," said Fong.

Intel's Lambert thinks the notion of selling to the enterprise is a red herring. "I don't think it's a question of enterprises not being ready to buy SaaS, it's that it makes more sense for small businesses to buy SaaS," she said.

"The value proposition of SaaS really appeals to small businesses, which were excluded from being able to buy legitimate software infrastructure that's enterprise ready because they couldn't afford it, it was too expensive and complex, and had long implementation cycles," Lambert said. While companies like Salesforce.com will move up into the enterprise, SaaS "will continue to appeal to small business," she added.