The Nov. 15 issue of CIO magazine features Steve Ballmer, Kevin Turner and Andy Lees (Microsoft CEO, COO and Corp. VP respectively) discussing SaaS in the enterprise.

This article reinforced three things in my mind:

  1. Regardless of what people think, Microsoft is dead serious about the SaaS trend in the consumer and the enterprise space.
  2. SaaS in the enterprise is a different beast that SaaS in the consumer or SMB (small and medium business) space.
  3. CIOs are rightfully asking themselves a lot of questions about what to do with this “SaaS thing".

I will let you (and time) be the judge of (1), but let me share some of my thoughts about (2) in this post and (3) in a following one.

 

(2) SaaS in the enterprise is a different beast that SaaS in the consumer or SMB space.

In my recent blog about SaaS and biology, I discussed the notion of habitat and how to survive species have to be in tune with the environment that surrounds them (or more accurately, only the ones in tune with their habitat survive). Let's pursue this analogy further.

The alternative to software as a service in the SMB space is often no software at all, hence the value of proposition of SaaS to them is easier to formulate. Using my habitat analogy, I would compare the SMB space to the bountiful tropical rain forest where you don’t have to do much to get access to food (the well known “low hanging fruits”). On the other hands, in the enterprise space, the alternative to software as a service is either software I already have or software I could run myself, on top of that, the integration requirements in the enterprise are very real; hence, the value proposition of SaaS in the enterprise needs to be more sophisticated. Using one more time the habitat analogy, I would compare that to the arid Mongolian steppes where food can be found in abundance, if you know the very specific hunting techniques particular to the steppe and are equipped with the fabled Mongolian bow.

What I am trying to say here? Simply that if you have “evolved” or are “in tune” in the tropical rain forest you might not be well equipped to survive in the Mongolian steppes. In other words, it is my opinion that if you are a SaaS provider very successfully providing a specific function to small businesses, it is unlikely you will be able to move “unmodified” into the enterprise space.

This seems somewhat at odd with the more generic and popular disruptive innovation ideas made popular by the book The Innovator’s Dilemma. But it isn’t :) The key word here is “unmodified”. The disruptive innovation theory relies on the assumption of “getting better” over time; i.e. becoming appealing to an increasing number of more sophisticated buyers, ending up displacing the incumbent technology. It is evident to me that if a SaaS provider, currently successfully serving the so called lower-end customer (happy with a “good enough” product), evolves (innovate) by including solutions to the “peculiar” :)enterprise requests, such as single sign on with the internal identity system, integration with the legacy IT environment, exposing an health model that can be plugged into the enterprise wide management system etc. then the incumbent (on premise software) has little chances of survival and will be displaced.

I discussed this with a few people already and many have told me: “If you are already in the bountiful rain forest why would you ever want to try your chance in the arid steppes?” I replied: “Exactly!” :)

The new thing here is that contrary to other disruptions where the lower end customer was less profitable and moving up the stack was a natural path, the so called “lower end” is potentially so large and so (currently) “less demanding” than it isn’t clear to me that moving “up the stack” makes necessarily a lot of sense.

I am not sure what it means for the Mongolian steppes hunters, should they stay there or should they move to the abundant tropical jungles or both? My gut feeling is that if you know how to survive in a more difficult habitat you will thrive in a simpler one; this would mean that once the so called “enterprise software” will have realized how to tap into the opportunities of software as a service (and many have already) they could “mutate” to a crossbreed which will understand and support all the intricacies of a complex world (Mongolian steppes) while being able to operate in simple life form mode (tropical rain forest) where/when necessary. I reinforce here the need of mutation (even if it is only partial). On the other hand, pure play SaaS vendors are native of this model and might be able to evolve faster as they would not require mutations.

In summary:

  1. Being appealing to SMBs is much simpler than being appealing to enterprises -> SMBs are the tropical rain forests with plenty of low hanging fruits, enterprises are the arid steppes of Mongolia.
  2. You don’t have to appeal to enterprises, the SMB market for SaaS is large and profitable -> the rain forest is big and there are plenty of fruits for all, no need to go to Mongolia (at least not for the foreseeable future).
  3. A fierce battle is emerging between the enterprise software vendors, with more sophisticated DNA, due to years of “evolution” in a more difficult habitat, but requiring mutations as they are not fully adapted to the new habitat and the native SaaS vendors who have streamlined their DNA but will need to evolve fast to be ready when Attila the Hun will come from the Mongolian prairies :)

Looks like that before picking my next software stock, I ought to ask a biologist whether mutating is easier or harder than evolving fast :)

As usual, feedback welcome.

P.S.

Next post we’ll look at (3) CIOs are rightfully asking themselves a lot of questions about what to do with this “SaaS thing”.