Making Sense of The SaaS Conundrum – Part2
In the second post of Making Sense of the SaaS Conundrum, I will be discussing how economics of licensing works in SaaS
and also present the story of “The rise of Adobe from ashes, Tech Industry’ flamboyant SaaS disrupter Marc Benioff’s visionary SalesForce and Oracle’s new zest to push cloud” in the licensing context.
Introduction:
The burgeoning SaaS market presents a great opportunity for CIOs to accelerate their innovation cycles by radically assimilating workforce to lean in towards their “core focus”. While the choice for SaaS can be taken by the executive board, it is really a great call for a cultural shift within the company.
The adoption curve towards SaaS is indeed showcasing the exemplar shift in how applications are developed, delivered, implemented driving increased responsiveness, agility and flexibility. SaaS based delivery model has outpaced any other software delivery model including traditional license software and IaaS. When enterprises make the choice to move to SaaS they are often faced with a multitude of challenges in the form of multi-tenant architecture but more prominently that stands out for them is the licensing dilemma.
The Licensing Catch-22 of Enterprises
The impasse of Licensing and its associated costs for enterprises has prevailed since IT gained momentum in the early 1980’s. Even with the multitude of technology waves ranging from client server architecture, mainframes to big data, cloud, mobility the problem still prevails.
In SaaS what essentially happens is that you let the provider take care of the “keeping the lights on” along with security for you; in simple words you are buying a service to use the software [which is as good as you buying the software].
The economics of licensing is a complex area. I will start with some basics and then move over to the crux.
While the market has numerous ways of purchasing license, the most common one is to buy a license and then you can later purchase the upgrades. Software companies typically do two kinds of upgrades viz., minor [occur frequently and are most likely free] and major upgrades [requires purchase with feature enhancements].
The Total Cost of Ownership is wrapped around training, purchase and infrastructure costs. Lets analyze each for both the models.
From A Value Perspective: In the traditional model, minor upgrades are free for the customer but the value isn’t realized unless you purchase a major upgrade. Once a software’s major release happens, the little incremental and free minor upgrades also don’t happen. You have to purchase the major release license to avail and stay relevant for the features. In the SaaS model, your value realization happens with free upgrades automatically with every major or minor release by continuing your subscription.
From A Cost Perspective: One of the most important aspects that needs to be kept in mind with applications is that the more you use an application the more you consume it and you become more versatile with it. The licensing cost wouldn’t go high in a traditional model unless you need a major upgrade purchase. In SaaS, there is no licensing but subscription cost. The more your subscription goes, your cost will go up. This is in a way an efficient use and allocation of users.
From a Training & Infrastructure Perspective: The traditional license model has an exponential growth curve for costs when it comes to training and infrastructure maintenance. SaaS has a spike in costs with subscription growth only and has the same training costs.
Both models have costs that for obvious reasons increase over time. Having said that, SaaS is more efficient for customers in lowering the costs with its architectural model.
Here’s a list of some more aspects!
Some Wonderful TakeAways from Adobe, SalesForce and Oracle:
The reason I list these companies here is to illustrate how the software leaders are also thinking in the context of cloud to be relevant and competitive. These companies at the same time demonstrate their powerful and growing user base and the mission-critical applications usage of SaaS in enterprises.
Adobe:
Adobe has been successfully positioning itself as a SaaS company to rock with. The journey of Adobe has been quite bold and strategic for its cloud transformation. It also enabled the company to accelerate its prototyping cycle, swiftly build, test & deliver new product capabilities and services, align and increase its engagement model with customers and enter untapped growth market segments.
A Look Back…
- With the entire world creating a data explosion with its content, Adobe was at a different pedestal all together. It wasn’t able to covert this content explosion for its own platform. It stood at the threshold of being irrelevant for its users.
Instead of enjoying the much larger slice of pie of its industry leading “Creative Suite” along with few more applications online, Adobe made the choice to move it to cloud announcing “Creative Cloud” and provide its users with monthly subscription model at $75/month and a yearly at $50/month. While this might have taken a hit at the giant’s revenue to begin with but it saw a massive pour of new customers who couldn’t use its Suite earlier due to costs.
What is Adobe’ Creative Cloud: Has three pillars Creative Applications, Creative Community, and Creative Services. Adobe’s Creative Cloud has been available for nearly 3 years now and shows great promise for continued accelerated adoption.
Adobe had an outstanding 2014 and its Q2FY2015 recorded a quarterly revenue of $1.16 Billion. There was a phenomenal increase in Creative ARR of $230 million to $2.02 billion.
Adobe today has over 4.6 million users as of June 2015. Creative Cloud as of date has around 3.4 million users which clearly indicates that it has overtaken Creative Suite. Adobe is aiming to make its user base to 5.9 million by the end of 2015.
As I have pointed out in my previous post, it is essential for enterprises and SaaS players to continue to focus on driving incremental innovations in the products/offerings. Till date Adobe has introduced around 1000 new and improved features to Creative Cloud since 2012.
To sum up, Adobe’s daring move undeniably teaches all the SaaS converters to take the plunge.
Oracle:
Oracle was indeed one of the last entrants to the cloud phenomenon. Nevertheless, when it did join the cloud bandwagon, it skyrocketed its revenue like never before. The above image speaks out loud about Oracle’s tremendous SaaS user base within a year. This is a clear reflection of the end user’ Oracle adoption preference to be the cloud platform. By entering the SaaS, Oracle has opened its gates to all the midsize players.
- Oracle’s transition to cloud in applications has reported a strong growth of over 130% year over year for SaaS.
Oracle Cloud CX , HCM, Fusion are gaining momentum in adoption by adding 800 new SaaS customers and 530 existing customer moved to SaaS, 120 net new additions to Oracle Cloud ERP.
The company now is aiming to make vertical specific SaaS. It did with MICROS in 2014 by enhancing its retail flavor.
Oracle’s transformation is indeed massive – it has brought forth the most comprehensive portfolio. Oracle took the decision of wanting to be relevant in the cloud world and looks ahead to surpass the existing cloud leaders very soon.
SalesForce:
SalesForce CEO, Marc Benioff not only founded the company but hammered out old grounds in IT and applications. Salesforce was aggressive in enabling enterprises to move beyond their caged thinking in the software world of licenses. It stormed the world with its vision in SaaS, creating multiple products that were user centric like never before.
Salesforce is celebrating a never before record – watch this incredible video to sense what I am hinting at.
To Conclude..
SaaS has made inroads in the enterprise space. If you are considering purchasing a Software, I would say, you need to really read about SaaS and why it differs from the traditional model. SaaS is indeed a better economic model, which provides more value of money for enterprises with time, in every release of the software.
The operating model of a traditional license player is to keep growing by acquiring new customers whereas for a SaaS player it is by performing better and increasing the usage with an existing customer. So the focus of SaaS player will be more in your enterprise’ favour.
The workforce out there is already overwhelmed with complexity, don’t hesitate in embracing the future of application development model -> SaaS.
So Are You Leading The Transformation Of Your Company In SaaS?
Stay Tuned for the last post in this series, which will detail out how workforce productivity gets an all-time new high for enterprises with SaaS.
References:
http://www.oracle.com/us/corporate/profit/big-ideas/012715-dlilley-2411421.html
http://cloudstrategies.biz/best-practices-for-smbs-moving-to-the-cloud/
http://pragmaticmarketing.com//resources/the-economics-of-software-as-a-
Technology Evangelist
Anita Raj
Team @MSExchangeGuru
