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SaaS is bad...

I've written quite a bit here about the dangers of adopting single vendor suites in terms of vendor lock in, and about how SaaS applications present a compelling value proposition for businesses as well as a disruptive threat to the existing enterprise vendors.

This weeks announcement that SAP is raising the price of support to 22% for all of their customers, on the heels of Oracle's recent 15-20% price increases and all time record financial results really do a great job of bringing these points together.

Ray Wang of Forrester Research wrote an excellent piece on the SAP price increases and the failure of SAP's SaaS offering (Business by Design) on his Software Insider's blog. One of his conclusions and recommendations is:

Most SAP customers adopted a single vendor strategy. The initial benefits were driven by a fear for complicated integrations, desire for process standardization, and need to expedite deployments pre Y2K. This strategy has led to vendor lock-in and vulnerability. Long term apps strategy should consider how to contain future risk in a single sourced ERP scenario.

So to summarize, businesses originally adopted single vendor suites to try to avoid technical and implementation risk. Now that they have the suites, they are stuck with unacceptable vendor risk, old technology, limited alternatives and are subject to capricious and excessive price increases.

And on the Oracle side it gets even more interesting. Sarah Lacy at BusinessWeek wrote a very negative piece on SaaS this week - negative from the financial perspective of the heritage enterprise software vendors that is. The gist of the story is basically that Oracle and SAP have become profit machines, and that SaaS isn't as profitable for the vendor as on-premises software licenses and maintenance. On why Oracle has not been investing in SaaS, she says:

Ellison would rather enjoy the bounty of an acquisition spree that handed Oracle a bevy of software companies, hordes of customers, and associated maintenance fees that trickle straight to the bottom line.

So here's the innovators dilemma at work again. Oracle and SAP and the other mature software mega-vendors have achieved a level of market power to raise their maintenance prices to a level that is higher than the total subscripton costs of most SaaS alternatives. They're running mature businesses and have become addicted to extremely high margins, that they are now driving even higher via maintenance pricing increases.

So this requirement for profit margins associated with a mature, highly consolidated industry prevents the heritage vendors from seriously undertaking SaaS initiatives at the same time as it will force their customers to look at more cost effective alternatives. When businesses really look at SaaS, they quickly see that the value proposition is compelling - the mega-vendors have a lot of smart people working for them that really get this, which is why they don't want to make it worse by validating SaaS.

What better case study for how industry disruption occurs could you possibly hope for?

A final thought. Do you notice like I do that in none of this discussion does anyone appear to be thinking about what's good for the customer...

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