SaaS Point Solutions Days are Numbered

I just finished reading a post on Sandhill.com titled “Best of Breed vs. Suite in the SaaS Era“, a Q&A session between Maryann Jones Thompson, editor of Sandhill.com and Sina Moatamed, CIO of BendPak/Ranger.

The general premise of the article is that SaaS point solutions or “best of breed” are going to eventually be replaced by suites – just as what happened with traditional enterprise software applications.

In the interview, Sino makes 5 significant points as they considered SaaS-based ERP solutions:

  1. “The major problem with a best-of-breed ERP solution is integration.”
  2. “If I’ve got three different best-of-breed applications supporting the process, how can I be sure the integrity of the data remains intact across all of them?”
  3. “In essence, best-of-breed products would create a new set of integration challenges…”
  4. “Support was another key consideration.. “
  5. “Throughout the purchase process, cost was an overriding concern.”

Sounds pretty familiar doesn’t it? The issues that Sina outlines are identical to the issues that drove consolidation of traditional enterprise application point solutions.

His conclusion: “The overarching need for a business “truth” pushed us to a single suite solution that was capable of tying all master business data and processes together.”

Saugatuck Technology, a research firm, has also been predicting the arrival of SaaS suites sooner v later for some time. They predict that full SaaS suites become widespread toward the end of “SaaS Wave III” (2012-2013) and the beginning SaaS Wave IV (2013- ).

We’ve seen how this play turns out in the traditional software sector which is why it is fairly obvious why the market values SaaS companies CRM and SFSF at an 8X EV/Rev multiple.

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  • Francisco Casas

    The consolidation of SaaS might actually be easier than the onPremise model because most SaaS apps are quite good at mashing up a solution and are migrating to REST interfaces. So interoperability between solutions becomes easier.

    A challenge of consolidation is the inevitable loss of talent as a large company gets acquired. This means that innovation basically stops at the acquired entity, this will continue to plague the acquiring companies. However, because of the easier interoperability this may be less important in getting applications to work well together and delivery of features can continue with lower quality talent.

    • Francisco Casas

      Rob,

      I agree with your timeframe of 10yrs before consolidation of SaaS players.

      But, I’ll disagree with the SFDC vs NetSuite comparison as one being easier to sell than the other. While both were founded by ex-Oracle people it doesn’t mean that they were equally adept at marketing. The SFDC marketing machine is the best one I’ve seen in the enterprise software business. As history has shown us, good software/products are not necessarily the winners, it’s their marketing and distribution. If NetSuite had the same level of marketing talent as SFDC, it would be much more successful, IMO.

      At the end of the day, all software segments consolidate. The SaaS enterprise players will too…someday, but not in the short term.

  • Rob Brown

    At a “gut level” I have to lean toward this integrated suite concepts as having inherent value over point providers just by virtue of experience and history. But I also have to caution such thinking with this thought; products eventually become features and that process is only governed by the pace of their distribution. That is to say, if it easier and more cost effective to distribute a component rather than a full feature set, the feature (component) wins since the customer acquisition cost is lower and the decision making process is far less complex. It is easier to sell tires than cars…

    Innovation is great as long as people know about it! Knowledge transfer in the world of intellectual property is the real bottleneck in the Cloud Era. Awareness is marketing, and that costs money…

    This is certainly true in the consumer space. Example: For years, the 33.3 LP was favored over the 45 since the distributor was able to leverage economies of scale in distribution and sell 10 songs for about the price of one. Now, in the internet era, physical distribution is no longer the bottle neck and every 15 year old I know buys songs one at a time then “compiles” his own custom solution (album) tailored to his own liking (requirement).

    Why not? Every song runs on a standard platform and they download without a trip to the record store…

    As a parallel, for SaaS, at least in the short term, I predict the opposite of the suite. As innovation has always outpaced physical distribution, for a software provider innovating more and more features into the next product release created for an economic efficiency in the distribution of lots of features at once…The bi-annual SAP upgrade was effectively the same as an artist’s new album, or 33.3 LP.

    However, now-a-days, in a cloud world, with little or no cap-ex, people are far more apt to buy a feature rather than an entire solution. Whether you call a feature something as complex as CRM or as minimal as contact management, what gets bought what is needed immediately, and usually from the vendor with the most mind-share. It isn’t uncommon to see CRM provisioned from SFDC, followed, perhaps, by enterprise calendaring and e-mail from Google, then by HR from Workday, maybe GL and AP from Intacct, web-conferencing, etc. until a unique corporate “album” is complied and complete…

    As standards for integration become services (take Boomi at Amazon) this process gets more and more dumbed down. The level of effort and overall cost to integrate will become less of a barrier as such standards arise and the price drops. The 33.3 with 10 tracks was replaced by the iPod platform running “n” tracks based on a standard format.

    So to, SaaS applications will have pre-formatted integration points leveraging common provisioning and billing clearing houses which will enable seamless adoption and payment models. Overall solutions will, in fact, be “mash-ups” and the suite, with all of its integrated value will take more time, require more consensus among decision makers and ultimately be more expensive to market and sell than point solutions in such an easy to integrate, mash-up world.

    My final point is this classic; SFDC v. Netsuite. Both born at about the same time, with about the same funding and pedigree. As of 2010, SFDC is at circa $1B in revenue, while Netsuite (arguably a better “integrated” solution) is at roughly $150M…Netsuite announced “integration to SFDC last year.

    Why, a point solution is easier to market and sell! Coupled with the fact that integration doesn’t cost nearly much as it did in the physically distributed world, “the pitch” is the bottleneck!

    I am not saying that integrated suites won’t happen in SaaS, I am simply saying that the software vendors won’t do the integration and/or hosting. As integration is standardized, the providers that bring the most value to the table will win, and that will be a strict function of scale. Think iTunes to the iPod…I believe the distribution point itself, the “Cloud” provider, will be the “one stop shop” to the solution seeker, providing the integration, common billing and provisioning capabilities, all of the sales and marketing as well as first line support in a commodized manner leveraging huge economies of scale.

    The “clouds” won’t be at such a point overnight and the SaaS providers will NEVER attain the revenue stream necessary to accomplish this. The whole process will take time. So I don’t see the integrated suites controlling the market in the same time frame that our friends at Sanhill.com do. My gut says more like 5 years, if not 10. Bottom line, don’t short your SFDC!

    • Francisco Casas

      Rob,

      I agree with your timeframe of 10yrs before consolidation of SaaS players.

      But, I’ll disagree with the SFDC vs NetSuite comparison as one being easier to sell than the other. While both were founded by ex-Oracle people it doesn’t mean that they were equally adept at marketing. The SFDC marketing machine is the best one I’ve seen in the enterprise software business. As history has shown us, good software/products are not necessarily the winners, it’s their marketing and distribution. If NetSuite had the same level of marketing talent as SFDC, it would be much more successful, IMO.

      At the end of the day, all software segments consolidate. The SaaS enterprise players will too…someday, but not in the short term.

  • http://www.openviewpartners.com/G George Roberts

    Bruce I could not agree more.

    As someone who lived through the integrated suites versus the best of breed debates back in early 2000’s like you did there is no doubt in my mind who ends up on the top of the hill in the end.

    I clearly remember the day that Larry was on stage and made his proclamation that Best of Breed was dead and Integrated Suite was the way to go. All the noise from the Ariba’s and Commerce Ones and the analysts who did not get it in the end did not stop the inevitable.

    Now as Bob mentions timing might be 5 years or 10 years but at the end of the day when you run a business having one customer master record that you know is correct will rule.

    Now that does not mean that you won’t see best of breed niche applications companies but they will have to have deep specialized capability or their valuations will be less than stellar when they get acquired in the end as the final consolidation for customer share occurs in the end… like it always does.

    By the way the same strategy also wins when it comes to technology and infrastructure products. The company that builds out an integrated platform of capability versus point products and solutions carries the day in the end.

    Bruce good post!

    G

  • Bill Coppens

    I totally agree that this is a very real possibly in the near future. There are many application available as platforms that are heading that direction. Google apps and google desktop come to mind.

    There are two main hurtles that will need to be overcome for large scale end user acceptance. A common UI and single signon.

    A common UI with a similar look / real and functionality is necessary so that the learning curve for a new application is minimal.

    The single signon should be obvious.

    With those two items in place most applications can be tied together.

    Great post Bruce.

  • http://thruthenoise.wordpress.com/ Bill Ross

    I touch upon this subject in my latest blog post (http://bit.ly/bNFEbJ) which is focused upon the VP of Marketing role but is equally true of the entire IT ecosystem throughout a company. SaaS has lowered the upfront capital expenses associated with IT but has added a new layer of complexity associated with integrating point (yet hosted) solutions.

    Companies at revenue up to about $50M/year simply do not have the capital or resources to do this. IMHO what will occur before consolidation is the emergence of managed services providers that will perform the integration and operation of the various offerings. In fact, from a sales and marketing perspective that is what we are betting the future of our company on.

    The natural evolution after consolidation is to build up service revenue and we expect that we will be acquired as an end result.

    –Bill Ross
    ThruTheNoise at gmail dot com