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“Salesforce.com is good BECAUSE it’s SaaS”

Lawson CEO: “Traditional software is like cocaine — you’re hooked”

Salesforce

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.

“When the sunk costs have been fully depreciated, customers effectively run the software for free.” Yeah, right. This is a shocking lie - unless Debes and on-premise software companies want to stop collecting maintenance payments from customers. Tell on-premise customers who have had their maintenance fees raised without warning, or had a running product suddenly characterized as “end of life” because their vendor was hungry for an upgrade, that they’re running software for “free.” The even greater cost is the lack of business flexibility these rigid systems empart on their customers.

“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?

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…
Ryan Nicols from Appirio

4 Responses to ““Salesforce.com is good BECAUSE it’s SaaS””

  • Bill Cloward responded:

    I think it’s worth highlighting another of the key reasons why SaaS solutions tend to have higher customer satisfaction results than on-premise software vendors (OPSV). The OPSV business model is driven largely by new sales. In an SaaS business model, however, new customer acquisition costs make retaining and penetrating within existing customers a more profitable activity. So SaaS vendors have a greater incentive to not just move on to the next deal once the check clears.

    One consequence of this difference in focus is reflected in the way software vendors tend to prioritize change/new feature requests. OPSV vendors tend to emphasize new features whose “curb appeal” can be expected to have positive impact on market share. SaaS vendors, however, are more willing to put a high priority on a change that existing customers will find useful, even if its value is only apparent to someone who has been living with the software for a while.

    A good illustration of this difference in who-do-you-please emphasis can be seen in the Salesforce IdeaExchange (http://ideas.salesforce.com/). Not only can users submit change and new feature requests, but they are published to the entire user community, which is encouraged to dialog on them and promote those which they would find most valuable. And to close the loop, Salesforce.com even provides pre-release insight into which ideas have crossed their action threshold (see http://ideas.salesforce.com/popular/ideas_under_consideration). I’d be interested in seeing links to OPSVs who maintain public feedback forums with equivalent bidirectional openness.

  • Craig Klein responded:

    Well said! Actually, many SaaS vendors also “hook” you using your data and contracts you can’t exit.

    Here’s a good list of “hidden” costs and hooks that many vendors don’t tell you about:

    http://www.salesnexus.com/lp/lp-hidden_costs_crm.php?ref=post

  • Eugene responded:

    Nice article. Thanks. :) Eugene

  • Dominic Ng responded:

    Completely agree on the “sunk costs depreciation = run for free” fallacy.

    The fact is that on premise technologies cannot leverage any vendor advancements without upgrade costs. With SaaS you get these advancements by default. This alone should provide enough of a business case to consider moving to SaaS.

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