Smart SaaS

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.