Chaotic Flow

Streamlined angles on turbulent technologies

Henry Ford once said: “Any customer can have a car painted any colour that he wants so long as it is black.” Then, in 1923 Alfred Sloan of General Motors came along and handed him his shirt by offering a tremendous variety in colors and models. But, GM didn’t do it one customer at a time. GM redesigned its manufacturing line with the required flexibility to produce a multitude of models and colors without compromising the inherent economies of scale of Ford’s assembly line innovation—a practice that has evolved into the concepts of flexible manufacturing and mass customization.

The primary enabler of mass customization is the elimination of setup costs. Setup costs occur from the labor, time and tooling it takes to switch a production line from one product to the other. High setup costs encourage long production runs to cover the expense incurred in switching over. By reducing them, production runs can be shortened. If they are eliminated, production runs can be reduced to a single unit. That is you can make the variations A, A1, A2, … An of a product (think GM models) for the same costs as making n units of A (think Ford Model Ts). If you apply this idea to enterprise software, taking each customer installation as a “unit” and the associated, customer-specific implementation, configuration, customization, and ongoing maintenance time and effort as the setup costs, then the roadblocks to mass customization in SaaS become clear: eliminate, automate and generally squeeze the cost out of your ability to handle unique customer requirements.

This business need entails an architectural requirement that is as essential to an SaaS vendor’s success as system security and the scalable, single-instance, multi-tenant architectural imperative. It requires automated deployment that consumes minimal resources, extensive, easy-to-use, self-service configuration and complete interoperability built on open, standards-based APIs. It cannot be off-loaded to VARS or customers. This shifts the costs downstream and undermines competitive advantage, because from the customer’s perspective, total cost of ownership is not reduced relative to installed software.

For the last five years or so, the conventional wisdom has held that software as a service holds great promise for enterprise business applications. There has been a spectrum of observers from zealots to skeptics, but no one has been able to deny the successes of salesforce.com and WebEx. In addition, a number of other vendors, such as Taleo, NetSuite, and SuccessFactors appear to be hitting their stride. Nonetheless, most SaaS vendors are still struggling to acquire customers and reach profitability. Why?

Clearly, the requisite larger investment in a vertically integrated hardware/software SaaS infrastructure combined with lower up-front subscription revenue entails an inherently longer ramp up to profitability than traditional enterprise software. But, my belief is that profitability issues run deeper than simple break-even timing, because vendors do not always recognize and rigorously adhere to the fundamental commodity, mass market economics of the space. In plain English, old enterprise habits die hard and it is easy to overspend on customer acquisition and product differentiation by targeting undersized market segments, chasing unprofitable customers, ignoring inefficient sales, marketing and engineering processes, and investing in functionality over quality, reliability, scalability and security.

This post is the first in a series under the heading “B2B SaaS Applications – Flies in the Ointment” that will analyze some of the common day-to-day issues encountered by these vendors, and whenever possible offer potential solutions to their ills. Some of the issues addressed in this series include the following:

• I don’t have enough leads
• My customers want to customize my application
• Getting new customers up and running is too long and hard
• My prospects aren’t Internet savvy
• My sales cycle is too slow and takes too much effort
• My prospects always seems to want that one thing we don’t have
• My prospects don’t have enough time or interest to talk to my sales staff

Also, any suggestions of interest are welcome.

If you buy into the idea that on-demand software is the next evolution of software into an industry characterized by mass commodity markets and interchangeable parts. Then, your next concern must be “How can I make money in a commodity market? How can I create a sustainable competitive advantage?” This post is the first in a series that attempt to address this question.

In a nutshell, competitive advantage in SaaS will not come as easily as it has in the past for enterprise licensed software vendors and it will not come from traditional methods such as creating wiz-bang features, protecting source code, obfuscating product information, or arbitrarily locking in customers with unique customizations. The main reason B2B SaaS providers are struggling today—while their B2C counterparts are thriving—is that as commodity suppliers, B2C SaaS vendors are much more in tune with the traditional sources of competitive advantage. B2B SaaS has as much in common with computer hardware, telecommunications, financial services, and consumer packaged goods as it does with the old craft world of enterprise software. Maintaining a cost advantage, cultivating brand loyalty, network effects, service quality, mass customization, reduced time-to-market and continuous disruptive innovation are the keys business success. And, they are much harder to achieve.

Simplicity and cost efficiency come first in SaaS

A word of warning before you attempt to be different, make sure you have your cost structure in line. If you are competing against traditional licensed software, lower cost is your competitive advantage. If you are competing against another SaaS player, product complexity and higher cost will eventually kill any other advantage you try to achieve. Why? Because there are (or will soon be) many other choices just like you. Change happens, consumers are fickle and expect their software for free, and business buyers have even less loyalty when it comes down to price.

There, I said it. Difficult customers with highly specific requirements who expect to derive competitive advantage from your offering need not apply. If your target market consists of a list of fewer than 500 control-freak customers with sophisticated IT organizations, and lots of unique requirements, then you are wasting your time thinking of SaaS as the fundamental aspect of your business model. At best, you are a “managed service” where the underlying cost structure is identical to customized, licensed software, i.e., it really doesn’t matter if you run it or they run it, it will take the same number of people, the same number of servers, and the same number of lines of code.

It is important to note that the term “commodity” refers to the fact that SaaS is a mass market, high volume business where by and large “one size (read code base) fits all.” We don’t have to look any further than Google search to demonstrate this. How much more “one size fits all” does it get! Type in what you want to find, push button. Also, I am not precluding the possibility that you can attempt to overlay another competitive advantage on top of the inherent cost advantage SaaS entails (see below). But, your efforts will be visible to all your competitors and often short-lived. The proposed idea is that cost efficiency trumps product differentiation, and you deviate from this principle at your own risk.

Fundametally, SaaS is the further commodifation of software achieved by freeing it of physical distribution and increasing interoperability through interchangeable parts (services) to create a disruptive software delivery model with new economies-of-scale and business models that achieve a significant cost advantage—not a functional advantage—over traditional licensed, installed software. It is typicially characterized by the following attributes:

• Commodity capabilities
• Remote, network-based delivery
• Massive economies-of-scale
• Easy adoption
• Interoperability
• Usage–based revenue (subscription, transaction, advertising, etc.)

The closer you get to achieving these requirements, the stronger your cost advantage over licensed software vendors and the greater the opportunity for SaaS. These basic requirements include a much wider set of applications than most people think of when they think SaaS. It obviously includes salesforce.com, the poster child for SaaS, but it also includes Google, eBay, Amazon, MySpace, web hosting, social networks, syndicated widgets, and seemingly all things your borrow or rent over the Web. But don’t be deceived, these businesses are successful, because they meet these criteria. The truly successful ones often combine the fundamental SaaS cost advantage with some other source of strategic advantage such as a proprietary “secret sauce” to your service offering, brand loyalty, mass customization (one of the many concepts here that I am un-repentantly borrowing from the manufacturing world), or or a first-mover advantage. So, here’s the SaaS elephant in the room: It is already here!! There are hundreds, if not thousands of successful SaaS companies. It is the essence of the Web. The small set of struggling B2B enterprise software wannabe replacements comprise but a handful of vendors in the SaaS landscape. And, they would do well to look to their successful B2C counterparts for creative solutions to their problems.

One might argue that this definition encompasses such a large variety of companies and business models that it loses its value. I don’t believe this is the case, because it recognizes the underlying essence of these businesses and provides a framework for creative thinking and rigorous analysis when considering the myriad strategic and tactical options for building your own SaaS business. For example, when the first challenge you face as the developer of a B2B on demand scheduling and collaboration platform is “How do I build awareness and draw leads to my Web site?”, you are just as likely to find the solution to your problem by looking to vendors like eBay or Amazon, in addition to the obvious salesforce.com.