InterWest Partners
SaaS Unlocks the Enterprise Software Stranglehold
By Bruce Cleveland
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The enterprise software market, which includes a diverse set of software for different functions such as HR, Sales, Marketing, Finance and IT is a mature market (with a range of 2% - 10% compound annual growth rate). This market is dominated by just a few global brands such as IBM, Microsoft, Oracle, and SAP. IT budget constraints and software complexity make it difficult enough for companies to support and maintain current enterprise software let alone allow new vendors to enter the mix. As a result, IT organizations have created extensive policies to block new entrants, making it extraordinarily difficult for recent independent software vendors (ISVs) to break into the market. This, coupled with the high go-to-market cost structure of an enterprise software company has made the enterprise software market a relatively uninteresting investment area, leaving innovation to stagnate over the past decade. However, all of this may be poised to change due to Software as a Service (SaaS).
SaaS applications are beginning to unlock the stranglehold that enterprise application software brands have once held. Contrary to traditional enterprise software, SaaS solutions are built using a modern, more open Web-based architecture - XML and SOA - with low cost tools that enable the vendor to rapidly and cost-effectively build, test and introduce new features and product capabilities. They have been built for users to easily configure, and are delivered as a service - hosted, supported and maintained by the vendor, not the customer. They typically employ a Web 2.0 user interface (UI) so they are more intuitive and require less training. Designed from the ground up to be "multi-tenant," they can support many customers concurrently using the same version of software. Costly, time-consuming and delayed upgrades that plague traditional enterprise software are a thing of the past and new releases are now instantly available.
With SaaS on the rise, many ISVs are trying to reinvent themselves as SaaS companies, using virtualization schemes to simulate multi-tenancy for a quick time-to-market solution. Unfortunately, the approach will only result in hundreds of virtual instances that will suffer from the same difficult upgrade problem of on-premise solutions. For today's ISVs to capture the full benefits of SaaS, they must go through a complete architectural - and perhaps more importantly - a business model transformation.
Moving Up Market
Due to their initial feature sets, (typically fewer than their on-premise counterparts) SaaS applications have tended toward an initial foothold in small- and medium-size businesses. However, as SaaS providers introduce more robust features into their offerings, they are finding their way into enterprise and giving rise to "departmental applications."
SaaS solutions are gaining traction in enterprise because unlike traditional enterprise software, which requires the buy-in and support of multiple divisions within a company, SaaS departmental applications can be sold directly to the line of business owner. They require little to no training, integration or involvement with IT for initial implementation or long-term maintenance and support. The pricing model - monthly subscription v. perpetual license - is also a variable versus a capital expense, making them even more compelling. In departments such as marketing, the SaaS model offers a solution that traditional enterprise application software cannot offer.
In other departments, such as HR and Sales, traditional on-premise software has been disappointing. Sales divisions tend to constantly be in flux and the department's applications must be highly flexible, but they don't necessarily need to be highly integrated with other applications. The department is a perfect fit for a SaaS solution; one that can be quickly modified by the functional business group rather than having to rely upon resource-constrained IT.
The SaaS Investment Opportunity
Initially, SaaS will appeal to the SMB market and various departments within the enterprise but as they build in more robust capabilities, we believe they will ultimately replace traditional enterprise software. Our initial SaaS investments are in analytics, marketing automation and sales forecasting. They include:
Cloud9 Analytics (www.cloud9analytics.com)
Marketo (www.marketo.com)
Right90 (www.right90.com)