SaaS Myths Series - Part 1

This post will be the first in a series designed to expose/discuss/debunk myths, or at least extreme exaggerations, about SaaS business applications. I am very much a SaaS advocate, but expectations are so grossly out of synch with reality that I felt it time to "bust" a few SaaS myths.

Myth #1

SaaS vendors have to earn your business every subscription period (month, year, etc.) or we will be easily replaced with a better vendor, therefore you can trust us to be more focused on your success.

The Truth

This is a particularly pernicious myth because it has its roots in a few grains of truth. Myth #1 is true, ONLY for applications that don't do very much or are used by very few people in a given organisation. However, if your SaaS application is strategic to the business, used widely, functionally deep, or heavily integrated with other IT assets, changing it will be far more costly than a few extra months of subscription fees to cover the overlap. And, the larger the organisation, the more costly it will be.

Don't think SaaS companies don't understand this either. You may not find it in their marketing, but quite often the SaaS business model is "acquire customers at almost any cost, retain them, and cross sell them your new products." It's lovely to believe that SaaS vendors have to "earn your business every day", but after you've spent five months and half-a-million dollars/pounds/euros implementing your shiny new SaaS HRMS, you won't be very keen on repeating the experience.

While I applaud RightNow for its aggressive approach toward giving customers more rights, I have to point out that absent pricing information, their marketing push is rather irrelevant in reality. Contract termination at customer convenience, marvelous, but at what price? RightNow is savvy enough to know that terminating is not at all easy for their customers nor anyone else's. Furthermore, after around three years, a SaaS vendor is really going to start making serious money compared to a traditional on-premise ERP type vendor over the long term.

One implication for all of us though should be the recognition that if a SaaS vendor is replaced or terminated, the state of affairs with that customer had to be very bad indeed. Buying organisations need to be aware that choosing a SaaS vendor for strategic business software is still a process of picking a long term partner that is not easily discarded. Choose vendors carefully and with proper diligence. It's just not that easy to get a new one.

Now for the good news. At least it wasn't eighteen months and three million dollars/pounds/euros spent implementing a dinosaur ERP like Oracle, PeopleSoft or SAP.

It's gettting very busy out there

NorthgateArinso buys Convergys HRO business for $100M. Skillsoft going private for $1.1B...so far. Authoria (Bedford) buying PeopleClick for $100M. SuccessFactors buying Inform for $40M. All this M & A action and we have just entered the month of march. This has to be some sort of record for M & A in the HR software space.

A few quick thoughts on these very different deals:

• HRO is just a shitty business. Sorry if I offended anyone, but it's the truth. A struggling ATS vendor, PeopleClick, gets priced at 2x ttm revenues. Convergys HRO gets priced at ~0.4x ttm revenues. That's right! The same price was paid for PeopleClick doing $50M in revenues vs. Convergys HRO doing $250M. Good luck NorthgateArinso, at least it was cheap.
• Skillsoft going private via a LBO. I don't follow this company too much as it's on the edge really of the HR technology market, but I don't think this situation is similar at all to the SumTotal nor the Authoria "take privates". Some learning analysts have speculated that the courseware market is tapped out and that Skillsoft will alter their business model as a private company. I think that there is something to this idea, primarily because Skillsoft was hardly a damaged company. Upon review of its financial data, its growth has slowed dramatically, but it is still highly profitable and fairly well valued. This one could be really interesting.
• PeopleClick Authoria. All I can say is that I have privately spoken to many people about this since it was announced, and to a person, they have felt that this is a ridiculous deal. Some of those folks are well know industry pundits, who published generous assessments publicly. I too think it is ridiculous and that Beford Funding hasn't a clue. I think Jason Corsello was very fair in laying out the issues in his post on his blog http://humancapitalist.com/?p=725.
• SuccessFactors...see my previous post.

The question continues to be "who and what is next?"