"Tech-knowledge-E&Trade;" part 1: expertise on evaluating saas (software as a service in web 2.0 - 3.0 vs. The lake wobegon era of software

Written by : Tim Vasko | Published on January 16, 2007
Category: TechnEnomics TM

I recently observed an RFP process that used the standard "old school" methods to replace some seriously outdated marketing systems. It was interesting to see in action the classic "definition of insanity" - expecting different results by doing the same thing over and over again. As Einstein once spun it, "we can not solve the significant problems we face today at the same level of thinking we were at when we created them".

One of the fundamental issues to consider in applying new technology, in a new market made up of "long tail" consumers, is the significant difference between software and SaaS (Software as a Service) technology.1 This means the hosted infrastructure, used by thousands of connected market participant companies vs. installed software and infrastructure behind a traditional firewall with traditional IT departments residing inside the classic corporate structure.

Today"s changing market is driven by the consumer. It is a market of economic expense based upon the cost of a company NOT deploying the solutions that will keep them from falling behind the communication curve with the consumer, rather than the actual cost of the solutions that they deploy. Whenever I see a firm that has a market position trying to "update" their legacy technology, I look to their competitors and see a wide open door to steal away customers and market share.

The firms that continue to try to quantify the cost of technology under the total cost of ownership model (TCO) don't realize the fundamental shift that technology is making in distribution. The irony is I see this happening in firms that have evolved because of innovation in technology in the first place. These firms hit critical mass and then the MBA thinking kicks in (like the MBA thinking I was fed before nearly anyone knew what the Internet was). They seek innovation in spreadsheet comparatives of TCO rather than focusing on the economic profit and costs of acquiring partnering with an SaaS company whose business model and mandate is to update, test and try to drive more business to their customers. In our case, unless we can figure a way to help our customer drive more transactions, our revenues go flat but if we push more business and more transactions through we pick up dimes and they pick up dollars. We both win. And so do today's picky, choosy consumers who expect dynamic thought along with the products they purchase.

I first heard of the economic business model in the oil patch. A very wealthy, very wise, very old Wildcatter said to me when I was just a pup, "Son, I don't care if you get a dollar and I get a dime - so long as I always get my dime." What oil wildcatters have always understood is that it doesn't matter what the well costs to drill if you hit a gusher and the "dimes" come flooding in. Show me a conservative oilman, I'll show you a farmer with one rig churning up and down and a crop of corn. Show me an independent that looks for the dimes and partners to find them, and I'll show you Armand Hammer.

In technology, the paradigm has shifted to an economic model that is adaptive: profitability of the platform (POP) rather than the old TCO model. In other words, a traditional software install, over a three year period, remains static with "versioning" upgrades (again a feature set determined by the programmers and we all know what economic and marketing geniuses program designers are). This is a defensive model where CFO's rule and innovation stagnates.

At the same time, the likes of Google, iTunes, Amazon, Netflix are throwing up a new approach to the market, based on marketing and process technology to capture the elusive audience (as are the competition in your business). Follow the model of these companies and what you won't find is static technology, installed on internal servers, at a static cost. A representative pool of one approach is like drilling one well in one location and expecting it to be a gusher. The name of the game is innovation. And the only way to innovate today is to partner with companies and consumers that have coinciding interests that drive your business. Static "TCO" measurement is no longer a viable approach to the consumer or business market - the spreadsheet evaluation of cost only is as dead as the eight track and vinyl is to music. What is needed is an approach that is consistently adaptive, widely disbursed and customized like an exploratory oil program, where the risk is shared. This is the domain of SaaS and the transactional based pricing business model of technology. In the oil patch, if indicators are good (using well logs - like market stats on the net), you drill deeper, go for it. If not, you make a change, explore elsewhere, get a new lease and go to where the oil will flow and where the customers are biting.

In technology, consistent adaptation can only happen where there are constant new users of the system in a dynamic environment. The SaaS platform should be regularly modified, updated and deployed to all of the users on the system and where there is motivation to do that. Your firm benefits from an SaaS model when the SaaS provider benefits from your increase in business.

After you are live and installed, SaaS providers have to go find other dynamic firms who have the "next great idea" and integrate that into the platform. It's like a free flow of constant market research and R&D ideas and tools for your business to deploy - front end and back end, with options, API's and services. That's how the companies that are kicking proverbial butt do it. Go to Google Labs and see what they are working on right now. Google has such an audience that they can't be considered a statistical pool of one. Most companies don't have that kind of following however, so they need to find the innovative pool that captures the collective consciousness of the market in another way. A good SaaS provider that is aggressive and innovative is the answer for the rest of the world.

SaaS model systems and tools are deployed fast as compared to traditional software projects. The great ones are regularly market tested as demanded by the market and succeed. The ones that don't meet the objective criteria, as determined by the market, adapt or stagnate (like traditional software). If you're using the right platform - you'll never see the bad stuff, only the economically viable and best of the best will rise to the surface for you to deploy.

Yes, this makes comparing traditional software tough for the firm when trying to make a technology decision. But again, if it were a market that could be run solely by CFO's, programmers, and operations managers, everything from books, records and movies to medications and contact lenses, mortgages and real estate could be laid out on a spreadsheet and the evolution and transitioning to new business models from upstarts would have no life.

PS: In recognition of the spreadsheet, CFO's and costs - I am not suggesting that the spreadsheet analysis be thrown to the wind, just make sure you add in the economic columns to the model that includes the all important innovation dividends that drive profits!

1 I highly recommend the book "The Long Tail" by Chris Anderson for any CEO or marketing manager

Tim Vasko

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