Sightings in SaaS

Archive for July, 2009

I listened to the NetSuite investor con call last night to find out how N made out in the 2nd quarter. Couple of things caught my attention. The average deal during the quarter was $34,000 for conventional NetSuite and $100,000 for NetSuite OneWorld. NetSuite is certainly moving upmarket. OneWorld, the product for companies with multiple subsidiaries, did especially well. This is going to be a real sweetspot for the foreseeable future in our opinion.

Also, Zach Nelson, NetSuite CEO, reiterated his interest in Service Organizations while talking about NetSuite’s recent acquisition of QuickArrow. Nelson said that the service sector would continue to see strong growth in mature economies and this is where NetSuite wants to play. NetSuite has always gone after those sectors of the market where they see strong growth, like e-commerce for example in the late 90’s and earlier this decade, and it’s a useful strategy. With OpenAir, an earlier acquisition, and now QuickArrow NetSuite has the opportunity to make hay in a very attractive sector.

Given the news that came out this morning about software sales continuing to decline, though at a lesser rate, in the US Q2, I also thought it remarkable that N posted growth in the quarter. Not stratospheric growth, but growth nonetheless. From a MarketWatch article on the US Q2:

Business investments fell at an 8.9% annualized rate during the second quarter, shallower than the 36.9% drop in the first quarter

Investments in structures dropped 8.9%, and investments in equipment and software fell at a 9.0% pace. Business fixed investment subtracted 0.94 of a percentage point from GDP, compared with a whopping 5.29 percentage points in the first quarter.

So all together I was impressed by N’s 2nd quarter. I don’t think that they set the world on fire, but they signed up over 200 new customers, and made significant progress moving upstream in customer size.

Oktoberfest is the 16 day festival in Bavaria that celebrates the harvest. With amenities like these who can argue with the idea:

beer and beauty

Thinking about the Enterprise Software market recently it dawned on me that we have entered our own Octoberfest Harvest celebration, almost universally. Harvest refers to the last phase of a product’s life when the marketing department comes to the conclusion that there isn’t much left to exploit, so cut all inputs and just harvest whatever value is left in the product. In enterprise software this phase appears to have happened across many vendors and products at roughly the same time. Let’s take a look:

• Microsoft purchased several vendor offerings including Great Plains, Axapta, Navasion and has done little with any of them. There was originally a thought about turning some of these into SaaS offerings, or merging the best of these products into a new MS product, but over the past couple of years there hasn’t been any news in this area. MS is all about consumer products and its operating system. One wonders why they purchased all of the software that they did, unless it was simply because they could. Google ‘microsoft business applications’ and on page one you will find this note from 2005 about MS’s big plans for their latest acquisitions.
• Oracle also went on a buying binge and they were pretty honest about the fact that they believe the market for enterprise software was leaving the growth stage and sliding toward consolidation. However they also said that under their ownership all of these products, JD Edwards, Peoplesoft, Oracle’s own applications, would undergo some serious tuning up, and that there would eventually be a fusion product allowing all of the best functions into a new product. The fusion middleware became a reality earlier this year, and we await the fusion applications. In the end, the innovation is really about supporting fewer products and upselling a new fusion app to currect customers.
• Sage has also acquired several products over the years and they are definitely in harvest mode. Their apologists even offer the idea that Sage is not in the technology/software market so much as the confidence market, as in this software will be around for a while. They, like SAP, have taken a poor swing at a SaaS product but have yet to make contact. Dennis Howlett doesn’t think they are really interested in launching a new SaaS version anyway.
• SAP has a SaaS product that they have been trying hard to keep under wraps for the past few years. Evidently they did not architect it in a way that allows them to scale the service profitably, even though they sell an account with a minimum of 25 users at $149/month/user, $44,700 a year. You would think you could make money at this, but who knows. When your core products attain 40% margins by virtue of their maintenance alone, you have a business model that is going to be very difficult to duplicate in the SaaS model. And what of the core products? Any innovation there or just bloatware additions that add a few more users and maintenance dollars to the annual bill? I haven’t heard of a game changer in a long time, so harvest mode once again. How important is harvest over new sales? The big news for SAP in 2008 was a huge fight with the user community over an uptick in maintenance fees. If the proof is in the pudding then that was an olympic pool of pudding.
• Any big innovators out there other than the SaaS offerings like Workday, NetSuite, Intacct or WorkingPoint?

Vinnie Mirchandani, the deal architect, spent several days at Fortune magazine’s Brainstorm and complains that the event was severly tilted toward consumer technologies. And when the attention does turn to enterprise matters, the topics are usually around other technologies that may use the enterprise transaction processing systems as a platform, but are rarely focused on business process innovation.

As someone who has spent, and continues to spend, a good deal of time on enterprise business process questions, problems and solutions, I wonder why the marketplace has turned as it has? Do  most organizations have the business processes that they need, creating the value that they want? Is it a case, then, of been there, done that and we’re good?

Or have organizations simply lost their enthusiasm for business process design and innovation? And if they have, then why have they? I meet very few enterprise application users who have mastered their processes, yet it appears from the evidence that no one seems too concerned about just moving on to whatever’s next. My question is have enterprise software applications simple sapped the strength of enterprise users? Has the bloatware complexity of products like SAP, Oracle, Sage and Microsoft simply exhausted organizations? And at this point do they just accept the fact they have an expensive business system that has ceased creating value but which it too difficult to move out of the way?

Oktoberfest can be a good time, but the day after can also be a a helluva hangover. Is this the way enterprise software buyers are feeling about their business applications?

Enterprise buyers feel affects of software inebriation

My good friend Jennifer Caputo has her new NetSuite site up and running, as of about an hour ago. This is one helluvanaccomplishment for Jennifer. She runs Tall Couture with a small staff and great passion. This was a lot for her and her staff, so she deserves one heartfelt congratulations – and she has it.

We created the site in NetSuite, top to bottom, with some interesting additions. First, since Tall Couture sells clothing, for Tall Women as you might have guessed, they needed matrix options for sizes. This required a custom solution because Jennifer did not want sizes appearing in the drop-down if they were not in stock. Always thinking of the shopper is that Jennifer. It was a good call, no doubt. Shopping can be difficult enough without having to find out after you have made your choice that the size you need is out of stock. Takes the fun out it pretty quickly. With the custom solution shoppers will only see sizes that are in stock.

Along the same lines, we also added in custom narrowing filter on the product pages so that the shopper can quickly filter out items which do not have their size. Again, that makes for a better shopping experience.

I’ll add on to this post over the next few days, but until then I invite any tall women who read this blog, or any men who know tall women and the difficulty of finding great fitting fashion, to take a look at Tall Couture.

The SaaS channel continues to be a bit of a conundrum. Recently SightLines had the opportunity to speak to several NetSuite partners about how they are handling the business of being in a SaaS channel and there was one thing that came through perfectly clear: Everyone continues to search for the right mix of consultants, employees, 1099s, support staff and for the right mix of business.

In other words, no one has yet figured out how to make the SaaS channel partnership a business with a clear roadmap to growth and long term profitability. Most common is the channel partner with 1 or 2 principals and a stable of 1099s for both consulting and customer support. There are a few partners with a short list of high value employees, and a group of 1099s for implementation and customization. It is nigh impossible to support a large employee base on the SaaS business model. Where on-premise consulting can often charge 8 times licenses fees for implementation, it is nearly impossible for SaaS consultancies to justify more than 2 times subscription. There is no hardware setup and configuration, no database install and training, no application server install and training, no application install and patching, patching, patching. These activities, often opaque to the business’s managers, eat up an awful lot of time, budget and timeline. They are big money makers for on-premise consulting.

So the SaaS partner is left with business process requirements and system configuration and, in some cases, customization. These are time consuming and laborious tasks, often difficult to predict. In addition, the SaaS client has not spent $250,000 for licenses. Their firm with 25 users can probably negotiate something in the $30,000 to $40,000 range, depending on what they need. So you have not going to walk in and suggest a $100,000 implementation. It’s just not going to happen. The end result is that you have an implementation in the range of $40,000 to $50,000 on the high end. You pay a short list of bills, take a salary, pay the consultants and that’s it. You have supported the cost of sales and implementation, but there is little left to grow the firm.

So what’s the answer? Some partners are looking back at the on-premise model and trying to find deals where they can push the tab into the low to middle 6 figures. These are home runs and they come along rarely. It’s a dubious strategy I think. You have to add in the $20,000 – $40,000 implementations to keep cash flowing. But in the long run you are still looking at a low margin business that will have a very hard time breaking out.

NetSuite has suggested publicly and to the partner group that the way forward is twofold: Model the business on ‘Service as Software’  using a remote sales and implementation strategy and building vertical apps on the NetBIOS (NetSuite’s Business Operating System – customization and extension platform). This sounds like a great idea but how can a Solution Provider partner with already thin service margins make the jump to Vertical software development, maintenance and support? This is not a simple jump to make. A company doing custom software development, which is finally what a vertical built on NetBIOS is, needs some deep pockets, maybe even VC or Angel pockets.

Selling grilled sausages is also a dubious business model unless of course you have a concession at a stadium, in which case you can make some good coin. Likewise, the most successful vertical apps on SaaS, NetSuite or otherwise, have a captive audience. I had the chance to chat a few years ago with a company that sells information and they created a vertical app for NetSuite that included integration with their data warehouse, enabling their customers to formulate deals on the fly for thousands of different items.  Their customers became then not only their data customers but their NetSuite customers as well. Good work if you can get it.

One of our favorite SaaS writers Phil Wainewright had an interesting piece not long ago about the opportunities in the SaaS integration space and I agree with him. But again, in this kind of derivitive market you have to have a product with a huge potential audience, or a captive audience to succeed, methinks.

So there is still much to figure out in the SaaS channel. SightLine will have its own announcement in the near term as we make our way forward.

Regular readers of this blog will immediately see that we are starting over and have a new format. Not only is this a new look, it is also a new start. For the first 4 years of our blogging life we used a blogging service that had exceptional functionality, but it also came at an exceptional price. Service however was not their hallmark. After constantly finding issues with the blog we decided to move on and have now implemented a simpler wordpress blog through our registrar, bluehost.com. It will take time to create a foundation of posts, and more time to add the necessary plug-ins etc. But we are confident that we can get there. We hope you stick with us for the ride.

Tom