The SaaS Manifesto: Rethinking the Business of Enterprise Computing

It doesn’t happen often, every 10 to 15 years or so, but we are in the throes of the reordering of the $4 trillion corporate IT market. And depending on which side of that transformation you sit, this is either the best time to be an enterprise technology company (see: renaissance in enterprise computing), or reason to start looking for a new line of work.

I certainly sit among the group that sees this as a huge opportunity, and it’s far from finished. If the first phase was to build replacement technologies for every part of the IT stack, the next phase—and the next golden opportunity—is to re-imagine the business side of the equation and change how buyers and vendors come together. That is where this SaaS Manifesto comes in. Think of it as a three-part field guide to the new way enterprise computing will be bought and sold.

Part 1: Navigating the Departmentalization of IT

In the enterprise IT world, companies like Oracle, Microsoft and SAP are established giants, so entrenched that every new company has had to either peacefully co-exist with them or else face getting steamrolled into oblivion. But that strength comes with a weakness: These companies are slow adapting new practices and evolving to new models. In fact, both SAP and Oracle recently attributed their missed earnings targets to “the cloud.”

And there is a major change occurring in the enterprise: Beyond the technical and architectural innovation we see in new products, there are fundamental opportunities appearing on the distribution and customer side that simply never existed in the past. In past technological shifts (e.g. from mainframe to client server, or from client server to PC) purchasing was always done through a centralized CIO organization, no matter the product. Large vendors could rely on the depth of their existing sales channel and the reluctance of customers to move outside their respective fiefdoms to successfully enter newer areas. Sure, vendors would be left behind in each shift, but it was largely due to lack of new technology, as opposed to a lack of changes in the go-to-market landscape.

Today, the new buyer is the operating department—HR, sales, development, marketing—and the decisions of which technologies to procure are no longer solely centralized through the CIO. In fact, nearly 50% of all IT purchasing decisions are now being influenced and/or made by an operating department, says an August 2013 study by Enterprise Strategy Group, as these departments look for purpose-built applications. This change creates one of the most meaningful differences in the new world of enterprise computing: Not only do the large players have to create or buy new technology, but they must also adapt their offerings and sales models to appeal to this new buyer.

Here’s why this shift is difficult for established players:

Perpetual vs. subscription licensing. Many current operating plans and sales organizations at the largest technology companies are built on the perpetual license model, where a customer pays one large sum up front and the vendor immediately recognizes nearly 100% of that payment as revenue. This perpetual license gives customers the “privilege” of paying an annual maintenance fee regardless of whether or not they take advantage of future upgrades. With subscription licensing, however, revenue is recognized over the life of the contract, making this an extremely difficult economic and organizational shift for an existing vendor.

Product cycle and software development methodology. For packaged software, new features are delivered (in the best case) twice a year. Often these feature releases are never deployed due to the complexity of field upgrades, resulting in users working with software that is years old. With SaaS, development is near continuous, allowing for rapid feature innovation and instant deployment of new features to all users.

Ease of adoption and trial-use. In the pre-SaaS, on-premise world, software purchases were made through a central CIO organization, which was equipped to deploy infrastructure and then test, certify and validate every new application. This highly concerted—not to mention, costly—effort required salespeople and systems engineers to run pilots, alphas and internal rollouts. The process would often take months, and by the time the software was ready to be deployed, there was no clear indication as to whether the product was really useful to the company.

However, with the advent of cloud and SaaS, the end user/department can easily try new software without an on-premise install, often at no cost. Developers and startups have found a replicable, reliable way to circumvent the iron grip of the industry’s major players and innovate, rather than iterate, on solutions to complex business problems. It’s a meritocracy of applications, where the best wins.

Inside sales leverage. With easy adoption and trial-use, a typical SaaS customer will have used a product and know its capability. This makes selling an upgrade or enterprise-wide deployment much easier and more economical.

Because of SaaS, the inside sales function is growing at 15 times the pace of direct sales. For existing companies that have large direct sales groups, moving to an inside sale model requires a complete re-tooling of the sales organization. This is a difficult transition and provides an opportunity for new companies to prevail.

Customer relationships. Customer lock-in has long been the hallmark of incumbent companies. Selling on-premise software directly to the CIO resulted in a tight relationship between the CIO buyer and the incumbent vendor. No matter how slow the rollout or buggy the end result, the fact that any new product had a receptive, locked-in customer, made it incredibly difficult for a new company to wedge its way in.

But with departmentalization, individual operational units have more autonomy to purchase technology. This gives the newcomer a real opportunity to establish relationships that the incumbent may not have. In fact, several large, incumbent companies are now making an effort to get to know the departmental buyer and get ahead of this trend.

The cloud and SaaS are stripping the complexity of IT to the point where any given operational department now has the confidence to purchase the tools they need directly from the vendor, circumventing a large part of the traditional IT procurement process. Moreover, the new buyers are not encumbered by risk-averse, IT decision-makers who operate under the belief that “nobody gets fired for buying IBM.”

By targeting this departmental user, Goliath topples almost before he sees David coming.

Up next: The Saas Manifesto: Part 2 – Building a sales organization that caters to the department, but recognizes the critical aspects to enterprise-wide requirements, and the changing role of the CIO.

Note: Part 1 of “The SaaS Manifesto” first ran in The Wall Street Journal‘s CIO Journal.

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