Don’t stay the course

Posted by Paul Giurata

This year’s downturn economy is forcing many organizations to choose between offering software solutions that “stay the course” or those that “adapt and embrace change”. For many companies, it is difficult to pull away from a traditional business model that’s been profitable, even though they know that the model faces significant threats and that profitability will wane.

The quintessential business school case study for this phenomenon is Kodak. Kodak tried to hold on to their profitable traditional film business long past the point where the signs were clear that digital photography was a threat and was going to overtake their existing business. They ignored the red flags and rode their business into the ground.

Software as a Service (SaaS) is another example of a fundamental threat to an old way of doing business. On-premise enterprise application vendors run the risk of pointedly ignoring this threat long enough to end up hurting their viability as a business.

Some enterprise software providers actually use the current economic crises as a justification for the decision to “stay the course”. They rationalize that they just don’t have the money and resources to invest in a new SaaS application or that with today’s market they would need to lower their SaaS pricing, so better to wait, until they can charge more. Instead they try to extend the lifespan of their current on-premise software by marketing it with terms like “tried and true, “stable, “tested, secure.” But marketing to customers’ fears can only trump a software wave for so long.

The reality is that now is the time to be investing in SaaS. But the reality is also that SaaS will require fundamental shifts in how a company does business. ReadWriteWeb recently published an article on how some of the big players like IBM have embraced SaaS. What I found most interesting in their post was some of the reasons they gave for why on-premise vendors so want to avoid SaaS.

• Putting SaaS financing on an old product is simply the ASP model and that is terrible economics. You will report horrible results to investors for a long time before it turns positive. In other words, you can’t just port an existing product to SaaS, you have to design for SaaS, focusing on multi-tenant architecture, high value scenarios , the right conceptual models and the full SaaS customer life cycle.
• However carefully you position your SaaS offering versus your traditional product, you will legitimize SaaS to your conservative clients and hasten the decline of your traditional business. Sad but true. A user-validated, well-designed SaaS that is always on and available, from any location, will definitely capture the attention of even the most risk-averse “I hate change” customer. So while it may impact your on-premise software business, it is better that the SaaS solution comes from you, rather then have your customers find it from your competition.
• Your current client base is not much help. You need to position the new SaaS offering for a new market, where you will be competing on a level playing field with the start-ups. Basically this means you need to be nimble, you need to use agile development techniques, and you need to think of innovation, not as new features, but as application design/UI that increases the usage and adoption of your solution by current and future customers.

Of course a move to a SaaS model is not an all-or-nothing, off-then-on proposition.  Many companies can offer hybrid solutions that help their customer bridge on-premise and on-line solutions. But regardless, now is the time to be exploring SaaS and acting like an agile start-up. Take the lesson of Kodak to heart and don’t stay the course.