SaaS & IT Spending

by mike on September 27, 2008

Research firm Datamonitor released its annual survey of IT spending this week and predicted that 50% of organizations will be freezing their 2009 IT budgets with another 13% anticipating cuts. Given the turmoil with the nation’s economy and troubled financial markets this didn’t come as a surprise to anyone.

So, how does this affect SaaS companies selling into the enterprise? Let’s take a look at a few key factors and see how SaaS companies stack up.

  • Pricing – This is top of mind for most customers today. Customers don’t want, and now are unable to sign, multi-million dollar deals. If that’s your model, then expect longer sales cycles. SaaS solutions have an advantage here since typically they have lower upfront pricing with a recurring revenue stream (e.g. monthly) spread out over the life of the contract. The exception are those SaaS vendors that require multi-year multi-million dollar contracts. From a customer’s view, they fall in the category with the traditional software players and will struggle.
  • Criticality – If it isn’t clear whether your solution is a “need-to-have” or “nice-to-have” you’ll quickly find out. Customers will only open their wallets to vendors that help them drive the top line, reduce the bottom line or have significant strategic importance. That’s it. While this isn’t specific to SaaS companies, I thought I’d mention since *most* SaaS solutions aren’t deemed “mission critical” (e.g. CRM). Most customers are still skittish with moving their core systems and data to SaaS. In time, hopefully this will change. Companies like NetSuite are paving the way.
  • Flexibility – Customers don’t want to be locked into software. Period. There was an interview a month or so back given by Lawson Software’s CEO, Harry Debes, where he predicted the downfall of SaaS in 2 years time and mentioned this point.

    It isn’t about locking people in. People lock themselves in! They see the software, like it, and want it. This is true of all professional software. The cost of moving is too high. As long as it’s working, people are happy to stick with one product.

    I disagree. This is traditional software thinking and it blows my mind. Those days are long gone. Application migration costs are lowering. Vendors who provide significant value, but don’t hold their customers hostage will succeed. The SaaS pay-as-you-go approach is ideal and resonates with many customers.

  • Delivery – Customers want to get up and running quickly. SaaS deployment times are typically much lower, especially with single instance multi-tenant approaches. More often than not a customer’s needs will change over time so it’s important to get the software in the hands of the customer as soon as possible.
  • Costs – SaaS companies are at a disadvantage here. They have high upfront costs with lower revenues. Customer breakeven is further away. So, if you are a SaaS company keep a close eye on your bottom line and remember cash is king. One benefit is that a SaaS company will have a more transparent and predictable recurring revenue stream. Use that advantage and plan accordingly.

In a future post, I’ll cover SaaS economics and how several public SaaS companies are faring.

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