Gloomy short term future for SaaS?

November 3rd, 2008 at 04:25am David Bush - Iasta

Supply Chain Brain recently republished findings from a study on SaaS fundamentals from Saugatuck Technology. In it, were some less than glowing prognostications about the immediate stability of the entire SaaS industry. I think you can already figure out where I will take this – would I really want to call attention to impending doom at Iasta?

However, they bring up some interesting points that are worth noting for vendors and practitioners of HR, CRM or SCM on-demand technologies. The authors begin by out lining the challenges that global companies are experiencing in the current economic recession. They point out that things will be rough but they disclose that many companies have cash on hand, in contrast to 2001, which could spur on spending for software and services.

Small / Emerging SaaS Providers Bear the Brunt. Those most vulnerable in this economic scenario are the small up-and-coming SaaS providers that have yet to establish a significant enough customer base that will allow them to ride out the storm. Given the “build it, they will come” nature of SaaS, with a predominately pay-as-you-go subscription framework, a large number of recently funded SaaS start-ups no doubt will struggle.

I am going to assume they are referring mostly to early stage start ups, here. When things slow down and business gets harder to close, the companies without annuity streams and established business models are in great danger of falling short. This would be a very scary time to not have everything well defined and repeatable in software companies.

The final summary concludes: The Bottom Line: The good news is that established SaaS companies have deferred -revenue-based business models that provide great revenue visibility–and which therefore allows them to better plan and match expenses to projected cash flows (vs. traditional enterprise software companies). So even in a tough economic climate, those firms that have already emerged will likely only grow stronger, as they can both better manage the downturn while potentially leveraging attractive acquisition candidates to their advantage.

For users, it is important to continually monitor the deferred revenues of public companies that they are evaluating–as even some of the SaaS giants like Salesforce are starting to show a flattening out of deferred revenue over the past two quarters, even though the top-line continues to grow nicely.

Well done, Saugatuck, you knocked it out of the park in the 9th inning. There are all kinds of important statements embedded in that closing. “Established”, “deferred revenue”, “better plan”, “projected cash flows”, are the exact reasons they go on to state that these companies that have already emerged will grow stronger as they bridge the gap over a downturn.

This is exactly where we stand right now, fortunately. All signs point to the weaker companies being severely exposed to risk via credit, sales or immature business execution. I think in the next 12 months, there will be a spike in acquisitions (publicly discussed as mergers) and some outright shutdowns. One has already occurred to the best of my knowledge, which I will discuss later.

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Entry Filed under: General, Technology / SaaS, e-Sourcing Marketplace