SaaS Software Sector Slumping

By Barb Mosher (@barbmosher) Oct 15, 2008

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In these times of economic upheaval, many businesses — large and small — start to take an even closer look at how they are spending their IT budgets. For those who have or are considering SaaS-based solutions, you should know there are opposing views on whether SaaS has what it takes to survive in the long term.

SaaS as a Long-Term Solution

The question of whether SaaS is a long-term option or not has been open for discussion for awhile now. Back in August, ERP vendor Lawson's CEO, Harry Debes, gave SaaS a shelf life of two years saying, “SaaS is not God's gift to the software industry or customer community. The hype is based on one company in the software industry having modest success. Salesforce.com just has average to below-average profitability.”

He went on to say in that interview that Salesforce.com would one day not deliver on its growth projections and that as a result its stock price would tumble and the entire SaaS market would go with it. Was he reading tea leaves?

Downgrading SaaS Vendors in the Market

According to a recent Dow Jones article shares of Salesforce.com and other SaaS companies fell after Salesforce.com ratings were downgraded and concerns were voiced by analysts over its prospects in the current IT spending climate. The article stated that Salesforce.com's shares went down more than 20% in late August due to analyst concerns and that for the year to date, the company has lost more than 40% of its market capitalization.

Of course, Salesforce.com isn't the only SaaS vendor to be suffering. RightNow Technologies and NetSuite Inc. have also seen their shares drop. One of the biggest concerns appears to be that many SaaS vendors get the bulk of their sales from small to medium-sized businesses — businesses that can't afford to spend their finances without careful consideration.

The Business Case for SaaS

Are these concerns purely related to the shaky economic climate and when things improve — and they will — SaaS vendors like Salesforce.com will bounce back?

Harry Debes says that it can take 10 years for a SaaS vendor to make any money. If that's the case, many of these providers may not survive. Not everyone agrees with with the Lawson CEO.

John Girard, CEO of Clickability, a SaaS-based Web CMS, says SaaS providers can generate an operating profit in the first year, if their business model is designed correctly. “Anytime you have a complex problem you’re trying to solve in a rapidly changing environment, models that support faster time to value will win.”

Maybe the question is not whether SaaS is here for the long term. Maybe the question is will this economic crisis help weed out the real SaaS providers from the look-a-likes.

Will the Real SaaS Providers Please Stand Up

Although many claim to be SaaS oriented, not all are true providers of Software as a Service solutions. We chatted with Rob Lamb of Clickability on how you tell the difference.

The real SaaS providers operate using a multi-tenancy model. This means that all customers use a single instance of the application. Customers can only access their information — their data and unique configuration requirements are virtually partitioned from other customers.