By Kevin Dobbs

Montclair Advisors, LLC

Now that many software companies really feel that the risks associated with a second recession are firmly in the rearview mirror, it now seems like everyone is looking to grow their businesses.

I read a great post yesterday by Bruce Cleveland at InterWest Ventures about the Value of Growth for SaaS Companies, which I thought really accurately captured a challenge that many software firms face when transitioning to a SaaS model.   This is a subject that is near and dear to me given my background as a reformed marketing executive and someone who was responsible lead generation at Oracle years ago during the Tom Siebel and Marc Benioff era.   I think it was Tom Siebel when he was running Oracle’s inside sales team that told me “I want it to rain leads from the sky!” At the time I was actually shocked because he was asking me to literally drown his sales team with qualified opportunities who wanted to buy Oracle’s database products.

As I have come to learn that he knew exactly what he was talking about and his track record demonstrates that productive sales teams deliver amazing revenue growth results.  Bruce’s post highlights that a SaaS company without meaningful growth is not worth very much and probably will fetch the low-end of the valuation curve, which is still pretty good in today’s crazy market (See last week’s post about the SaaS Bubble).   So how are high flying SaaS companies like Salesforce and SuccessFactors achieving CAGR’s in excess of 30% every year?   Check out this chart I put together on some of the leading publicly traded SaaS firms (sans Salesforce because they will skew the chart):

As you can see the companies with the higher growth rates are also the ones that have high market caps (valued more highly by Wall Street).  What is really interesting is that SuccessFactors was able to grow by almost 50% for the past three years, even through one of the worst recessions in the last 100 years.  The value of growth can also been seen by a company that recently went public, Cornerstone OnDemand, they have been rewarded with a market cap that is over $800M even though the company lost more than $40M last year.  Seems crazy right?  But they have a great organic growth story along with a major channel relationship with ADP which could also signal even faster growth in the future.

If you talk to any software sales rep they often complain about their pipeline and the lack of quality leads. Reminds me of those coveted Glengarry leads  from Mitch and Murray downtown.    So at the heart of all of these companies and their rapid growth rates is that they have all developed a core competency to generate high quality leads and build pipelines quickly.

(click on picture to see clip)

Here are some tricks that I have learned along the way that will help you to build out your SaaS lead generation strategies:

• Use a Portfolio Approach - Depending on your product, buyers, and market there may be many ways to generate interest.  Campaign elements of a typical lead generation strategy are a combination of organic and paid web traffic, email campaigns, webinars, customer programs, social media and targeted events.   Don’t put all of your investment in a single demand generation approach, but reward the tactics that generate quality leads at an affordable price.
• Test and Test Again - With the portfolio approach you will need to continually test your messaging, packaging, value propositions, and price points.   The best-in-class SaaS firms are continually testing and refining their lead strategies.  This is important as most SaaS marketing organizations are trying to lower and optimize their Customer Acquisition Costs (CAC).
• Automate Where Possible -  There are a lot of great Sales 2.0 tools available today that can give you a real unfair advantage in the lead generation process.  Companies like Marketo, Pardot, Eloqua, Constant Contact, NetSuite and even Salesforce offer many tools to help you automate and analyze your marketing efforts.  I would definitely recommend implementing a lead nurturing or drip marketing program to continue to work your lower quality leads, this is a great way to build your pipeline over time with little direct human intervention.
• Track Everything - Make sure your sales operations and marketing teams are tracking and analyzing all of your lead activities and conversion rates.  You don’t need to be overly complex, but just tracking some basic things like lead scores, lead acceptance rates, leads converting to opportunities and close rates can help your organization to fuel your high growth SaaS sales engine.

With Cornerstone OnDemand’s recent IPO (NASDAQ: CSOD) and their high valuation based on a negative EBIDTA, many are starting to ask if we are headed for a second Internet or SaaS Bubble?

I do agree that some of the valuations at this point are a lot higher than a reasonable person would expect, but this is probably just pent up interest in the technology sector. It doesn’t help that Facebook and LinkedIn has seriously pumped up the valuations for Internet/Social Media firms, but today’s SaaS companies are very different from the Dot Bombs of 1999/2000.

Remember these companies?

All of these companies were built on bad business models, too much money and expectations that were out of control. And by the way are all out of business.

But not all of the Internet companies that were formed during this period were bombs; in fact there are a number of firms that are now pillars of the technology industry including these firms:

It would be safe to say that each of these companies struggled during and after the Dot-Com collapse but they were able to modify their models to take advantage of the efficiencies that the Internet provided. Amazon has built a business that can effectively compete against the largest retailer in the world, Walmart, even though its sales are only 1/12^th their revenues.

All of these Internet Survivors had to develop a real business model that would deliver solid margins, profits and growth. They each had to assemble experienced management teams, learn how to deliver superior customer service and build trusted brands. Not easy to do, but they did it.

Fast-forward to today and we have a whole new set of Internet and Software-as-a-Service companies that have emerged and gone public including these firms:

(1) CSOD IPO: March 17, 2011

(2) SREV IPO: March 25, 2011

As you can see most of these companies were founded before the Internet Bubble burst and were forced to create real business models that could deliver profits.

At Montclair Advisors, we specialize in SaaS business advisory services and we know many of these firms quite well and they all have strong management teams, growing businesses and staying power. Unlike the Internet firms that went IPO in 1999 or 2000, most of these firms have had to build up their businesses over ten or more years and are based on some form of recurring revenues.

Major differences between the companies on this list versus the early Dot Bomb firms include:

• Proven Over Time. As you can see most of these firms are at least ten years old and have weathered the economic changes through the last two recessions.

• Businesses at Scale. Most of these companies are over $100M in annual revenues, which means they have been successful in selling into multiple markets and geographies.

• Recurring Revenue Streams. Anyone who has been involved with a company that has developed a subscription business can tell you how hard it is to create a meaningful recurring revenue stream. The advantages of being a SaaS software company based on subscriptions means that revenues remain consistent so there is a high degree of transparency and visibility.

• High Degree of Customer Satisfaction. All of these companies are dependent on satisfied customers that want to renew their annual subscription agreements and purchase more services. This is quite different than the ‘drive-by’ relationships many of the early Internet companies developed with their customers.

• Strong Management Teams. After the Dot Com crash it became much harder to file for an IPO and manage a company in the post Sarbanes-Oxley world. These next generation of Internet companies have attracted leading management expertise that knows how to innovate and rapidly scale viable businesses.

So are the valuations of companies like Cornerstone OnDemand and Servicesource, Facebook and LinkedIn too high? Are we beginning to see a SaaS Bubble? Maybe, but all of these companies have been built for the long term and will be around long after any correction, unlike their early Internet cousins Web Van or Kozmo.com.

It is always hard to predict the future, but here are my 10 Predictions for the SaaS market in 2011, and they might just happen:

Blockbuster Subscription Software IPO’s

A number of large consumer subscription software players including Facebook, Groupon, LinkedIn, Zynga and Skype could really open up the public markets with a major blockbuster IPO (or IPO’s) in 2011.  SaaS firms that look to get everyone’s attention with potential IPO’s next year include Cornerstone OnDemand, Workday, Marketo, Service-Now and possibly Plateau.

Major Players Merge to Form the Next Big SaaS Brand

So my prediction (which is a pure guess) is that SuccessFactors and Taleo finally get over their respective CEO ego issues and decide to merge.   Sounds a little crazy, but when you really consider their product portfolios, there might not be as much of an overlap as you might think.  SuccessFactors is basically a performance and analytics company and Taleo is a recruiting and learning (after acquiring Learn.com) company.  They both have some additional components that could be plugged into to create a more comprehensive suite of CPM and Talent Management offerings.

This would also create a combined company with a market cap approaching (SFSF + TLEO) $4B and annual revenues in excess of $400M, which would be the second largest SaaS firm in the market, and a clear leader in their space.  Another potential marriage might be Concur and Ultimate Software.

Oracle Finally Pulls the Trigger on NetSuite

It seems like most Oracle SaaS rumors involve the acquisition of Salesforce.com, and that may happen some day, but the more likely combination for 2011 is NetSuite.  Larry Ellison is a major investor in NetSuite (early investor) and own/controls more that 50% of the company’s shares.  He may come to the conclusion that he needs some real SaaS DNA inside of Oracle to help grow their Fusion business in 2011 and beyond.

SAP Throws in The Towel and Buys Leading SaaS Player

Similar to the realization that many other major traditional ISV’s will come to in 2011, that they are too far beyond in SaaS to catch up organically, SAP will buy their way into SaaS.  The Business ByDesign project for SAP, by some estimates, has cost more than $1 billion and there isn’t much to show for it.  I always thought that the Sybase acquisition was just a smoke screen to cover up how little progress has been made with BBD at their most recent Sapphire user meeting.   Like Oracle, I think SAP reaches out into the market and purchases a SaaS firm to jump start BBD.  RightNow would be an interesting choice since SAP wants to make a splash in the CRM market.

Master Brands Continue to March Towards SaaS

These big software companies are no longer just paying lip service to SaaS or the Cloud, they continue to catch up with the subscription software market transition that is happening everywhere.  All sizes of customers who were battered during the recession are no longer interested in spending a lot of capital and time that has been associated with traditional software projects and are becoming increasing comfortable with SaaS.  This shift in the Software market is massive and is going to take at least 10 years, and we are probably only in the second year (post-recession) of this shift.  Continue to look to see what SaaS moves firms like Oracle, SAP, HP, CA and Infor make in 2011.

Continued Explosion of PaaS offerings

Look at Salesforce.com’s recent moves to expand their Force.com Platform-as-a-Service portfolio with VMForce and then buying Ruby on Rails provider Heroku for over $200 million.  Beyond Force.com there are many other offerings here today and coming in 2011 including App Engine by Google, Apprenda, Azure by Microsoft, Corent, Engine Yard, Facebook, Flex by Adobe, Fusion by Oracle, Intalio, IPP by Intuit, LongJump, Nimbula, SuiteCloud by NetSuite, and Wolf Frameworks.

As long as traditional ISV’s continue to move towards SaaS, there will be a green field opportunity for all types of PaaS solutions. Look for several of these firms to be acquired in 2011 by larger ISV’s.

Salesforce.com Continues to Expand Beyond CRM

After attending Dreamforce this month, it was curious to see a number of Force.com firms offering ERP extensions starting to gain real market momentum. Companies like FinancialForce.com (they purchased Appirio’s PSE business) who are delivering a growing suite of financial and accounting applications, JobScience who continue to build out their Talent Relationship Management suite on Force.com, Less Software who is selling a targeted Supply Chain Management solution and even Remedy’s Service Desk offering, RemedyForce Cloud.   If Salesforce offers an attractive exit for any of these firms or their Force.com products, like they did with Heroku, then it might be possible to do a quick roll-up of key partners to create a competitive Cloud-based ERP solution.

Interestingly this type of move might be triggered by Oracle buying Netsuite or Workday going public.

Fake SaaS Firms That Use Private Clouds Will Loose Altitude

Although Private Clouds might be a viable alternative for enterprises who are looking to leverage the economics of the Cloud, for software companies this type of approach will only provide short term ‘Fake SaaS‘ types of solutions.  This type of business model of hosting single-tenant software was known as Application Service Providers (ASP’s) and none of these companies that emerged about 10 years ago were able to find a business model that really scaled profitably.   Private Clouds will offer a short term technology transition steps for software companies who are moving away from just offering traditional on-premise software but this trend will really start to fade by later next year.

New Revenue Streams for SaaS Firms That OEM

At Dreamforce ‘10 Salesforce.com announced that they are launching their new Database.com offering, a Database in the Cloud. What was interesting about this news is that Salesforce is really just reselling a private-label version of Oracle’s database technology.  For Salesforce this is a unique way to take proven Oracle software, designed for on-premise deployment, and create a true subscription-based version of this product.  No doubt that Salesforce will need to do some work to create a massive multi-tenant version of an ORACLE database and then deliver it as a service, but they are already doing this today through their Force.com platform.  This could be a significant new revenue stream for both companies and look for other SaaS firms to try OEM’ing their software as a way to improve their CAGRs in 2011.

This should be an interesting year as the economy improves and the SaaS market really begins to gain some serious momentum.  It should be a fun time to be in the Software business again.

Kevin Dobbs,  Montclair Advisors, LLC

By Kevin Dobbs

The last few months have been quite active in the SaaS market and here are some things that caught my attention:

• Who would have believed that we would be seeing Initial Public Offerings after our recent recession but new offerings include SciQuest (NASDAQ: SQI), Qlik Technologies (NASDAQ: QLIK), Ancestory.com (NASDAQ: ACOM) and Financial Engines (NASDAQ: FNGN).  There are a number of upcoming IPO’s including Talent Management provider Cornerstone OnDemand.

• You can tell the SaaS and Software markets continue to gain momentum based on the number of M&A deals over the past 90 days including Oracle buying Art Technology Group, hardware company Dell purchased SaaS integration firm Boomi, Deltek buys government market research firm INPUT, talent management leader SuccessFactors buys analytics firm Youcalc, Taleo purchasing Learn.com for $125M, recruiting firm Kenexa acquired Salary.com and even PE-owned SumTotal Systems buying Softscape.

• Firms that are making good progress in their SaaS transitions include Callidus (NASDAQ: CALD) and Plateau Systems.

• Software companies who seem to be having more trouble with their current subscription and license models include Concur (NASDAQ: CNQR), MicroStrategy (NASDAQ: MSTR), Manhattan Associates (NASDAQ: MANH), and SAP (NYSE: SAP).

• The Venture community continues to fund SaaS and Cloud Computing firms, several who have been profiled by this blog have received funding in the last six months (congrats!) internet billing firm Zuora lands $20M, Cloud management platform RightScale grabbed $25M, multi-tenancy Cloud platform firm Nimbula raises $15M, marketing automation provider Marketo, Bill.com, social platform provider Jive Software raises $30M, Gooddata and Cloud9 Analytics.

• SaaS, Software and Cloud Computing firms have also made some interesting management changes over the past few months including; ex-Oracle president Charles Phillips (video) moved over to become the new CEO at Infor, Taleo lands a new CFO former Palm executive Douglas Jefferies, Saba has added a SaaS-experienced CMO Karen Steele, SuccessFactors brings in seasoned President from Salesforce.com - Doug Dennerline, PeopleclickAuthoria Chairman Charles Jones returns as CEO to run company and well-respected analyst Ray Wang joins Constellation Research.

Here is our updated Public Company SaaS interactive spreadsheet.  Enjoy!

After our post on January 26th we got several great comments about the cost of starting a SaaS company.  It definitely takes a commitment to build a true SaaS company, especially when you consider some the following facts about the 15 public companies that I tracked in my high level analysis:

• Average Start-up Capital Required:                                   $44M
• Average Time Required from Start-up till IPO:                 7 years
• Average Capital Required per Year till IPO (Burn):             $6.8M
• Average IPO Proceeds:                                                    $76M
• Additional Capital Raised After the IPO:                           $243M
• Average Total Capital Raised:                                          $363M
• Average Market Capitalization:                                      $1,262M
• Companies Who are Profitable:                                            8

The costs of getting a SaaS start-up off the ground are substantial but only about half of the firms we tracked actually started out as a pure SaaS company.   These other Cross-Over firms started out as either Application Service Providers (ASP’s) or were traditional On-premise ISV’s that move to SaaS through a combination of organic migration or through a series of acquisitions.  Companies like Concur, Kenexa, Taleo and Ultimate Software have all transitioned to SaaS from an on-premise heritage.

Montclair Advisors - SaaS Start Up Costs - Pre IPO

The shortest time to go from start-up phase to an IPO was 4 years and the longest was 13 years.  Most of the firms we tracked were founded between 1997 to 1999, which was prior and during the Internet Bubble.

When these firms went public they raised a range between $30M (LivePerson and Ultimate Software) to over $150M (DealerTrack and NetSuite), but on average they raised about $75M.  All the firms then went on to do additional capital raises from $32M (LivePerson) up to $750M (DealerTrack) but on average each raised $243M!   The total capital raised, when considering both pre IPO, IPO and post IPO capital raised, these firms raised between $100M (LivePerson and Ultimate Software) to close to more than $500M (DealerTrack, Salesforce.com and SuccessFactors).

Montclair Advisors - SaaS Start Up Costs - Post IPO

After going public, this SaaS market basket of companies have done well as a group.  The majority of the firms are profitable, which makes for solid cash flow performance, revenue visibility and overall stability of the company’s stock, for the real SaaS firms.

The most valuable company, based on their Market Cap is Salesforce.com at more than $8B and there are at least 4 other SaaS firms with valuations over $1B (Blackboard, Concur, NetSuite and SuccessFactors).  When comparing the amount of capital raised to the market valuation, the 5 best performing firms are Salesforce.com (.09), Ultimate Software (.13) , Concur (.19), RightNow (.22) and LivePerson (.31).

Montclair Advisors - SaaS Start Up Costs - Market Caps

This year, as the economy improves, promises to launch a few new SaaS IPOs and we will continue to track this core group as well as a larger group of Hybrids and Cross Overs and will periodically report back with our findings.

 SMB Financial Productivity Software

There is an increasing number of Software-as-a-Service (or SaaS) firms jumping into the smallest end of the Small and Medium-size Business (SMB) market, and they are offering a variety of financial productivity solutions.  This is the fastest growing segment of the economy according to the Bureau of Labor Statistics there are up to 21 million self-employed consultants and small firms in the US.

This has traditionally been the sweet spot in the market for companies like Intuit.  Although most customers are somewhat happy with their offerings, Intuit’s offerings tend to be cumbersome, packed with way too many features, hard to use and upgrade.

 A new set of SaaS providers has emerged with products designed specifically for the small business owner.  These packages are all delivered through the Internet as a service, so no more visits to Best Buy were required. Many of these new software services are very low cost and some were even free, and because of this, the adoption of these products has been rapid.

This Sector Report only covers the incumbent software provider and the promising new SaaS suppliers.

Financial Productivity Software Profiles

Intuit

Quicken                                                                                                          Free and $

QuickBooks                                                                                                    Free and $

The clear leader in providing Financial Productivity solutions for small businesses is Intuit.  They have now also wrapped a set of small business services to help newly formed companies including payroll, website and logo development.  Intuit is now offering a free single user version of QuickBooks, Intuit Online Payroll and Intuit Websites (from the Homestead acquisition) to encourage small businesses to use their financial and business productivity products.

Intuit has been trying to move more of their offerings to a subscription model for several years, without a lot of success.  But they are continuing to push SaaS and you will see more SaaS offerings in 2009-2010 including QuickBooks Online.

Estimate millions of Quicken and QuickBooks users/customers.

Public company (NASDAQ: INTU)

New Alternatives

Mint

Online money management and budgeting software service.                          Free

This company has been adding 3,000 customers a month and have been a SaaS company to watch.  Mint’s service is delivered through a subscription model but their software is free to use.  To set up Mint’s money management service takes about 5 minutes, compare that to other industrial-strength solutions which require outside assistance and offer too much functionality for a small business.

Estimate 850,000 users/customers.

Private company based in California. 30 employees.

Fresh Books                                                                                                Free and $

Online invoicing, time tracking and expense management.

FreshBooks has had a lot of momentum coming out of 2008 and offers a subscription invoicing service that is designed exclusively for freelancers and small businesses.  Their focus is to provide products that are very simple and easy to use as well as integration to other productivity tools like 37Signals Basecamp project management software.  FreshBooks offers a free service for a single user and then an incremental pricing structure based on usage. 

Estimate over 700,000 users/customers.  60% in the US and 14% in Canada.

Private company based in Toronto, Canada.  30 employees.

NetBooks                                                                                                                

On-demand business management suite; marketing, sales, operations and finances.

NetBooks offers a one-stop location for a small SMB to get all of the necessary business services they need to run their company.  Their offerings are similar to the breadth that Intuit’s QuickBooks is now offering.  NetBooks offers its software on a subscription basis and targets very small SMB’s.

Private company based in California.  30 employees.

Bill.com                                                                                                         Free and $

Online accounts payables and bill management.

Bill.com provides a simplified way for SMB’s to manage their payables using their SaaS based platform. The company appeals both to SMB’s but also to accounts who can use the Bill.com service to simplify their client’s payable processes.

Bill.com has just formed a partnership with Intacct and integration to QuickBooks.

Private company based in California.

Xero                                                                                                               Free and $

Online account system; banking, invoicing, payables, expenses and contacts.

Xero’s core is a set of financial products with some added contact management and reporting capabilities.  Definitely targeting the small business owner with a very simplified SaaS offering.  Support for firms in UK and Asia-Pacific.  Nice user experience and Mac-friendly.

Estimate over 4,000 customers.   Signed up more than 1,000 during December ‘08 and January ‘09.

Private company based in New Zealand. 50 employees.

Kashflow                                                                                                      $

SaaS-based accounting software.

Kashflow has been in business since 2002 and offers a very simplified online global accounting service.  Provides a 60 day free trial and then pricing is based on a per user per month model.

Private company based in the UK.  9 employees.

Outright                                                                                                         Free

On-demand income management, expenses and taxes.

Outright used to be gobootstrap.com and targets its products to very small SMB’s by offering dead simple financial products.  Outright is offering its products free of charge during its beta test phase.  Has integration partnerships with FreshBooks and Shoeboxed.

Private company based in California.  5 employees.

Workday                                                                                                       $$

On-demand financial management, expenses, procurement and ERP.       

Workday provides a complete financial suite of SaaS-based products that scale for SMB’s and large enterprises.  Their ERP suite also provides HR, payroll, benefits, procurement and expenses.  Workday solutions require professional services support to install and configure.  Dave Duffield, the founder of PeopleSoft is also the founder of Workday.

Private company based in California. 320 employees.

Intacct

On-demand financial management and accounting software.                       $$

This product suite is designed for the small business that has outgrown QuickBooks.  The suite includes general ledger, purchasing, order management, inventory, contract and revenue management.  Intacct has available integration into Saleforce.com, OpenAir, QuickArrow and many industry-specific solutions.

Estimate over 2,500 customers.

Private company based in California. 100 employees.

Concur

Concur Family of Products                                                                         $$$

On-demand corporate travel and expense management.

Although one of the original Software-as-a-Service companies, Concur is focused on the high-end of the SMB segment all the way up the Fortune 500.  Deep functionality requires outside consulting assistance to set up.  Pricing is a monthly subscription based on usage.  Probably not a good fit for a small SMB company.

Estimate more than 6,000 customers.

Public company (NASDAQ: CNQR).

Netsuite

Netsuite Accounting and ERP Suite                                                          $$$

On-demand accounting, time and billing, order, purchasing and inventory management.

Netsuite is designed for the company who is looking for a modular on-demand ERP suite.  The suite also includes Customer Relationship Management (CRM), eCommerce and Business Intelligence modules.  All products are offered in a SaaS format.  Company also offers a Platform-as-a-Service (PaaS) framework for Netsuite developers who want to build their own applications.

Estimate over 5,000 customers.

Public company (NYSE: N).

Given the current state of the economy, many individuals are now setting up their own businesses.  Using these new subscription-based Office and Finance Productivity tools can not only be very affordable for start-up your businesses but also give the consultant or SMB many of the same capabilities they had at their larger firms. 

The good news is that there is no shortage of SaaS-based Financial productivity products out there to choose from and this is just a top line summary of what is available.  Many of these products are available at very attractive price points, including many who are free.   Using or switching from older solutions not only can save a lot of money but also make SMB’s more competitive in this tough economic environment.

As I go out and talk to firms about Software-as-a-Service I am increasingly finding firms that offer technology solutions that won’t easily fit into a traditional software mold,  but want to move to a real subscription model.  Part of the reason is that capital budgets are clearly being cut back in 2009 and also because of the success of larger, publicly traded SaaS firms and their perceived market value.

Consider that Salesforce.com (NYSE: CRM) in FY ‘09 will have $1B in cash on their balance sheet!  That is really amazing for a software company their size.  The longer term success of the SaaS model is based on predictable and transparent revenue streams that are attractive to not only investors, but also with the customers who are buying their solutions, investors who are taking stock in these firms and even employees who would rather work for these types of companies.

So back to the headline, Hybrids, Cross-Overs and TaaS.  These are new variants of  that I have come across that show that the software subscription model is evolving into many different formats.  Let me tell you about what I am seeing:

Hybrids:

Many firms are now offering solutions that don’t just comprise software but also include specialized services and hardware.  I have also found that these firms often combine a mix of hosted and on-premise deployments.  In some situations the need for an on-premise deployment is often related to the vertical market company sells into and their client’s security requirements.  For instance, in healthcare, hospitals often have very inconsistent infrastructure from location to location and the necessary integrations may be more easily accomplished by deploying behind the firewall.  Security for certain types of industries won’t allow for hosted or cloud-based systems, they really need an on-premise control of their data and systems and this would apply to many branches of the Federal government.

What’s even more interesting is the emergence of device companies who require mostly a hardware solution that is wrapped with software and services.  A great example of this is Garmin the GPS provider.  As they look at the market, is it better to sell a GPS device for $499 and a $10 a month subscription or sell the entire solution as a subscription for $39 a month?  Think about all of the device companies who are going to be challenged to get corporations to pay capital dollars for hardware, maybe a subscription option in their business makes more sense in 2009.

A couple of interesting articles to look at are Hybrid SaaS Approach is Likely Way to Go and SaaS + Appliances = Possible Peace of Mind.

Cross-Overs:

These are traditional software firms who are beginning to migrate their business models from purely a perpetual license to a subscription business.  There are thousands to these traditional firms, sometimes referred to as ISV’s (Independent Software Vendors) but not all of them are technically Cross-Overs.  Making the change can be a very difficult and dangerous endevour.  Some of the best known Cross-Overs I have run across are Concur (Expense Management),  Ariba (Procurement), and SciQuest (also Procurement).  What is clear is that many other firms are starting to moving towards a SaaS model including firms like Sabrix (Tax software), AutoDesk (AutoCAD), SumTotal, BusinessObjects (acquired by SAP), and Kana (Email).

Clearly changing your entire business model is not something that can be accomplished in a couple of quarters, it often takes companies several years to fully migrate.  Smart companies will usually create a multi-year roadmap for each of the functional areas of their company as they transition.  This transition is much harder to do if you are a publicly traded company, especially with near-term affect on cash flows.  That is why firms like SciQuest went private as part of their transition.

TaaS:

With the tightness in the credit markets and shifting technology buying habits, I believe in 2009 you will see a strong shift by any firm selling technology to embracing a subscription model.  I think this will result in a broadening of the SaaS term to expand to Technology-as-a-Service or TaaS.  Just like with the Hybrids and the Cross-Overs, this won’t happen overnight but these TaaS firms will want to have the ability to deliver their products through a subscription and host through the cloud where possible.

Think of industries that have low margins and will be challenged to purchase technology in 2009; Retail, Healthcare, Transportation, Education, State and Local governments to name a few.  Imagine if you could go to a school district and completely outfit them with laptops, wireless infrastructure, software, training and support - all for one easy monthly fee paid over five years?  What about the trucking company that wants to deploy a GPS tracking and monitoring system across their fleet, pay $5M now or $138K over 3 years?  Smart technology firms that begin to rethink their business models to take advantage of this market shift will be the big winners in 2010 and beyond.