An ISV's Silver Lining?

Over on SaaS blogs, Sinclair Schuller posted saying that the current economic downturn might have a
silver lining for traditional software vendors. The logic went like this;

  • Traditional vendors are used to making huge money
  • This makes it difficult for them to convert to a SaaS delivery model (think
    sales cannibalisation here)
  • Their revenue is starting to dry up as CAPEX is being cut by customers
  • Given an already decreasing revenue line, the concerns around SaaS are less
  • Ergo – ISVs should consider a move to SaaS during this downturn

Sinclair states that;

If your revenue streams are drying up, it might be wise to look at a SaaS
model. There is an equilibrium point where the significantly less expensive SaaS
model will slow or even stop customer attrition. Yes, your revenue stream might
be smaller, but it won’t be disappearing and you still have active accounts.
Leveraging this scenario to move to SaaS is very appealing to me because it
helps solve an immediate problem within a couple of quarters

Which all sounds kind of good apart from the fact that;

  • Most ISVs, whether they admit it or not, are in denial about SaaS. They
    consider it either irrelevant or a passing fad . Their entry into the on-demand
    space is half hearted at best
  • The conversion from traditional to SaaS models costs money – boards and
    shareholders are unlikely to be willing to expend on what is to be seen as a
    high risk punt at best
  • SaaS subverts the traditional sales channels, traditional marketing
    approaches and traditional ISV cost structures yet more fuel for the "stick to
    our guns" fire
  • First generation SaaS vendors aren’t completely removed from the current
    downturn – again is a board likely to approve an about face that puts an ISV
    into direct competition with a vendor displaying downward profitability trends?

Conceptually Sinclair is right – in the same way as he’d be right telling the
triumvirate of sick auto makers (Ford, GM and Chrysler) that they’d be better off getting together and
concentrating on producing small, compact hybrid vehicles that did 1000 miles
per gallon. It may make sense but there’s a significant DNA mismatch here. So
to have SaaS start-ups got an entirely different make up to traditional

Yes, yes I know the big boys are making attempts to
enter the on-demand world – but given the resource the big players have behind
them and the snails pace at which they’re innovating down the SaaS line, it’s
hard not to believe that these forays are half hearted – at best. As ZDNet

The bigger challenge for [beyond the technical one] will be that elusive
on-demand business model. Look at’s margins (which are starting
to look as negative as its stock price), and Netsuite’s struggles, and you can
see what SAP is trying to avoid.

So the writing may indeed be on the wall for traditional vendors – but
unfortunately it’s written in a language they don’t understand.

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Ben Kepes is a technology evangelist, an investor, a commentator and a business adviser. His business interests include a diverse range of industries from manufacturing to property to technology. As a technology commentator he has a broad presence both in the traditional media and extensively online. Ben covers the convergence of technology, mobile, ubiquity and agility, all enabled by the Cloud. His areas of interest extend to enterprise software, software integration, financial/accounting software, platforms and infrastructure as well as articulating technology simply for everyday users.

More about Ben here.

One response to “An ISV's Silver Lining?”

  1. Mike Dunham

    Of course, you’re right – ISV’s with traditional premise-based licenses are in a pickle. Their development, support, sales, and business model are all in the wrong place to move to a SaaS offering.

    But – on the other hand, if they don’t – their competitors or some new upstart in the market will. There is a simple fact in most application verticals we tend to ignore. ISVs have limited marketing budgets – to be successful they concentrate their sales efforts on a segment of their market, usually the top end. If they penetrate they can be successful.

    SaaS gives them a different opportunity. Without as much support overhead for installation and local maintenance they can reach a broader market. That doesn’t mean sales costs aren’t still an issue and sales are inherently different, but the opportunity is to address a whole new market.

    In this situation, ISVs will have to consider a “parallel product” which isn’t easy, but I would argue is their only real path to exit. Their premise based model will erode over time. It is harder to find a buyer for a product line that is entirely premise based. With value and real income eroding – there are few options.