Why two blogs get it wrong: falling down on the complexity of cloud

Two blogs TopAccountants and Software Advice both fail to get to grips with the full complexity of cloud

Last week I bookmarked Adrian Pearson's post entitled: Does Size Matter For Business SaaS Adoption? I also flipped to the piece he was critiquing, The Cloud and Why Installed Software Isn’t Going Away on the Software Advice blog.

Both pieces make fundamental assumptions that are either incorrect or which fail to challenge underlying assumptions. I'll start with Adrian's piece.

He makes a lot of good points about whether we're talking 'small business' or 'enterprise' but I believe the distinction he makes is misleading because it drives the discussion in the wrong direction:

I think small, owner-managed businesses and larger, enterprise businesses are very different markets for SaaS vendors.

He is right to say these different types represent different market need but all businesses are enterprises of one sort or another. A better distinction would be those that do not require customisations and those that do. It turns out that for all but the simplest of operations, software landscapes have to be tailored to suit need.

Even at the very small business level I'd argue the fact we see so many add-ons to financial solutions suggests there are specific needs that cannot be met by a single vendor.

If you check out what BrightPearl is doing for example, they are now offering multi-channel processing to all of their retail and wholesale customers. They realised that consumers buy in many different ways and simply offering (say) a PayPal integration to retail/wholesale customers is not enough.

Adrian goes on to say that:

Even where small businesses do use non-consumer software, such as accounting products like Sage or QuickBooks, these are relatively low-investment, shrink-wrapped software purchases. With little investment in them, making a change to a Saas alternative is not a big deal.

This is not the case. The prime reason that Sage and QuickBooks are so difficult to dislodge is that users become familiar with things they use, even when they know they are clunky. In order to overcome this stickiness, the SaaS provider has to go many steps beyond what the on-premise provider offers. That's why what my colleague Phil Wainewright called out So-SaaS back in 2005. Those offerings simply don't have enough differentiation to make them worth the pain of switching. Pain? Yes, pain.

It doesn't matter how good a new piece of software is. It doesn't matter how self evident that switching is a good thing. It doesn't even matter if there are potential cost savings. What matters is that users need to learn something new. I have yet to meet the user who volunteered for learning without asking a slew of What's In It For Me? questions. And even then there is the need for persuasion.

The only way that users will readily switch is if they see that something new will obviously add value to what they are doing, reduce pain and be a joy to use. All three ingredients are needed, two out of three is not enough. It also helps if there is some financial pain involved as was the case at Camden NHS:

Rob Wood, programme manager for GO, explained that the four-council initiative has required that all agree common processes, chart of accounts and the like as a pathway to concentrating on the things that matter: “Change of this kind is never easy but once people see that we’re eliminating tasks that get in the way of doing things efficiently then they appreciate that they will do a better job.”

That is the challenge for the SaaS/cloud vendors. And it applies to all vendors, not just those addressing SME needs.

Now let's look at the other piece, from Software Advice.

It too makes many excellent points and especially around the on-premise business model:

One reason: it’s hard to abandon the pricing model. As consumers, we buy a one-time license to use installed software and then typically don’t make another purchase from that vendor until a new version of the software is released a few years later. In contrast, businesses purchase annual licenses to use software and pay the vendor an additional 15-20 percent of the license fee for access to software updates and technical support. This is a lucrative, high-margin business.

The market capitalization, share price, and therefore returns to investors in all of the companies that generate these billions of dollars at high margins are dependent upon their existing revenue streams and business models. This alone makes a transition to SaaS easy for vendors to resist.

This is real. Vendors I have spoken with who are prepared to discuss the topic know that transitioning carries many risks. In my discussions last week with Ab van Marion, COO UNIT4, he candidly acknowledged that while his company is transitioning to subscription-based services, he could not predict when the tipping point would come.

He doubts that anyone truly knows when the SaaS/cloud transition will become apparent, an argument we could easily debate and reach no conclusion. The business model is only one problem.

Compensation for sales people is another major issue and especially among the larger vendors. Sales people are used to earning fat commissions tied to deal value. It is a no-brainer to sell a £1 million licence deal rather than a £100,000 subscription deal, even if the subscription deal is recurring. SaaS/cloud vendors are currently adjusting their compensation models to attract the right sales people. But that is a temporary problem. Once the big ticket deals and upgrades run out, behaviours will change as the SaaS/cloud model bites more deeply.

So where is Software Advice wrong? The author cites five reasons for on-premise continuing to win among buyers:

  • Security as the most common inhibitor. I never see this as an issue once the customer has performed appropriate due diligence. If he had asked whether vendors do a great job in dispelling security myths I'd have been more likely to agree. That is still a work in progress.
  • The business model stated as being unpredictable on cost. Deals I have seen and reports back from vendors suggests that buyers are hedging their exposure by signing up for multi-year deals, so locking themselves in on price. Vendors like Workday and NetSuite regularly cite multi-year deals. Where customers don't want to take the risks associated with multi-year pricing, they negotiate on current price to ensure they get a predictable outcome in a growing environment. Those deals work where the buyer sees beyond the hard money per seat and into value delivered.
  • The need for speed stated as impacting graphics intensive applications. This is not an area I know particularly well but in the business applications space I have seen no performance issues of note attributed to the software.
  • The ecosystem or rather the implied lack. Every vendor I speak with either has or is planning massive ecosystem operations as a way of helping customers extend their applications. The poster child in the business space is Salesforce. The future will come from the open source communities. Vendors understand that it is the platform play that wins, not just the application. Of course we need to see models develop but it is not a gating factor in any deal I have seen.
  • Customisation stated as required and hard to deliver. NetSuite wins deals all the time because it offers rich configurations. If needed, NetSuite can be extended through scripts. This is not that much different to customising an SAP or Oracle system. And before the geeks come jumping all over me in horror, ask yourself one question: do customers really need all of those customisations or are they simply trying to recreate a pre-existing business model without thinking about improvement?

I am most critical of the author in the lack of imagination around how business is developing. The piece assumes an inertia that somehow, business is frozen in time.

That may be true for business models among some software vendors who are making last ditch attempts at incremental improvement through upgrades but it is not true for end user organisations. They see only too clearly the risks and opportunities coming at them from developments in the consumer space or, more directly, through fiscal pain exerted from outside bodies like government spending mandates. Hence my reference to BrightPearl as an example of meeting need where it is happening and pointing towards shared services as offered by UNIT4 which, in Sweden, has led to a single-instance fully-fledged ERP being deployed to 170 organisations with 150,000 users - and growing.

All of this ignores the much more interesting topic of whether SaaS/cloud offers genuine opportunities to disrupt business generally. The other week, Phil Wainewright winkled out another example of business that could not exist without the cloud:

Recruitment Genius is what I would call a classic frictionless enterprise story, finding its niche by using the cloud to take friction out of the recruitment process — its service posts a company’s job ads to a tailored selection of online job boards, filters the responses and provides an online applicant tracking system where recruiters can sort the CVs and arrange interviews.

It is when you look at SaaS/cloud from that perspective that you see its real, long term potential. It is why I get excited when I see players addressing vertical markets straightaway rather than trying to build out general purpose applications.

The only question on everyone's mind is how long it will be before we see demonstrable decline among the on-premise vendors. I believe that has already happened but that it is largely hidden by a temporary upswing arising out of much needed upgrades and ongoing maintenance revenue. As always - watch this space.

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