SaaS Rollup – Get…Set…Go

By Subraya Mallya - June 2009 | Topics - Cloud Computing, SaaS

I recently read a post from Sranama Mitra where she makes a excellent case for a impending SaaS consolidation wave. She initially posited that Intuit and ADP were due for acquisitions in the payroll, billing space. As if that was the nudge Intuit needed, it promptly announced a deal to acquire PayCycle. Now ADP it is your turn.

While large deals Data Domain, Sun Microsystems, WindRiver, seem to be taking the center stage, I think Sramana is spot on with her take on the SaaS industry.

If you look around there are a handful of SaaS companies that are profitable (and a few others are lucky to land large follow on rounds of investments like Workday). There are some great technologies that could be bought at some attractive terms.

The business model in SaaS is predicated on companies making large upfront investments to build up infrastructure, product and team. In addition, with the Customer Acquisition Costs (CAC) being front loaded to a large extent, it is supposed that over a period of time, ideally ranging from 1yr to 3yrs, a customer would prove to be profitable. All subsequent customers are expected to be acquired at a lower cost and faster profitability based on an evolving on-boarding program, best practices, templates etc, as I alluded to in an earlier post. But in this climate, without cash and luxury to make investments for growth SaaS companies present some great opportunities.

There are two constituents who might and should be active in this.

Firstly, larger companies like Intuit, ADP, Amdocs, Autodesk and I will add SAP, HP and Microsoft to the mix (Oracle, IBM, EMC, Cisco already being in a acquisitive mood) can get ready made entry into an already established, risk reduced opportunities. Acquiring SaaS vendors will also give them a low- barrier-of-entry solutions that will complement their existing on-premise solutions already used in most companies.This will also give them an influx of innovative products which are more in tune with today’s user demands and easier to implement. In this tough economy, when net new sales are tough to come by, these larger companies can use SaaS offerings to get into new accounts.

Secondly, SaaS companies themselves should look and consider merging with complementary offerings thereby providing a integrated offerings to customers. This would make a lot of sense from a customer point of view. I know companies that use SuccessFactors for Human Capital Management, SalesForce.com for CRM and Intacct for Financials. While the SaaS companies themselves amplify the rhetoric of  “the days of integrated suite of products in numbered”, the reality is far from that. If you talk to a IT executive  they will tell you that, one of the biggest hindrances for SaaS adoption is integration. They are continuously trying to make things works in an integrated fashion, thereby reducing the point of failures, share data and be able to map to their business process. Going to point solutions from different vendors is definitely not going to get them there.

In an ideal world, it would be great, if SaaS companies formed consortia where they innovate independently but fit into an overarching framework so their solutions works in unison. But that would be nirvana and asking for too much from technology vendors.

This downturn might provide an opportunity for companies to find suitable partners and willingly merge so they have a much more compelling broader solution. It will also allow them cross-sell into each other’s accounts.

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    SaaS Rollup – Get…Set…Go – http://bit.ly/oizEB
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