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6 Things SaaS Needs To Do In 2009

Software as a service is making headway, but can't yet be called a game-changer in the enterprise software market. Here's what must happen for SaaS to gain wider acceptance in 2009.
5. Build A Better Record Of Profitability And Growth

There's hasn't been another SaaS vendor that's matched the consistent revenue growth and profitability of Salesforce, which recently surpassed the $1 billion-a-year revenue mark and was added to the S&P 500 (replacing the beleaguered Freddie Mac). But one company's success doesn't prove the health of an industry (or, in this case, the broad acceptance of a new software delivery model).

The SaaS model is clearly a difficult one on which to make money, since SaaS providers don't get the millions of dollars in up-front licensing fees that they can then pour into operation and research and development.

That's why NetSuite (for ERP SaaS), while consistently showing double-digit revenue growth each quarter, has never once reported a profitable quarter in its eight years of existence. RightNow Technologies, another good-sized SaaS provider, has had spotty financial performance over the years. Intacct (ERP) and Authoria (human resources) show promise with reported strong growth, but it's unknown what kind of profits, if any, those companies pull in, since they're not publicly traded and don't release earnings statements.

Startup Workday (ERP) also shows promise with big deals with Flextronics and Chiquita Brands, yet the company is still very much in the ramp-up stage. Concur is both profitable and growing, yet it's in a very niche business (employee expense management).

In fact, with all its success, analysts can't even agree on the future of Salesforce. Cowen & Co. analyst Peter Goldmacher has been consistently critical of the company, warning investors against Salesforce stock, saying in a November note that "we continue to believe Salesforce.com is struggling in the enterprise."

There's a reason traditional software companies like SAP and Oracle have moved so slowly with SaaS: It's not as profitable as traditional software licenses and maintenance. More SaaS vendors need to prove that it's a good business to be in to attract investors and talent. Venture capitalists have been fairly willing to invest in SaaS startups and even older SaaS companies, but the funds will dry up if the profits don't start pouring in.

6. Convince Customers That They Can Live Without Customization

Most businesses have taken for granted the ability to tweak and customize software to their liking, while recognizing that each customization requires time and resources. But one of the reasons SaaS costs less is because it's a one-for-many (e.g. multitenant) application, which means little or no customization.

Take Workday, for example, which offers a variety of configurations and solicits input from customers on features and functionality, which it may include in service updates. But it's not customizable, and many of its customers like it that way. It keeps things simple. After all, how much customization do you need in a human resources application?

There are, however, forms of SaaS customization: Salesforce, for example, offers a development environment for creating SaaS applications and extensions that run on its platform. But in many cases, SaaS is more about choices in configuration than software code that's been tweaked beyond recognition to fit the needs of a specific customer. That's why SaaS providers will need to convince customers that options in configurations are an acceptable alternative to customization.

Editor's Choice
Mary E. Shacklett, President of Transworld Data
James M. Connolly, Contributing Editor and Writer