It’s funny…

December 15th, 2008 at 07:21am David Bush - Iasta

Everyone who lays the smack down on the SaaS industry appears to be burned investors, installed application vendors, or hyperactive IT departments. I read this CIO article, which brings on frequently quoted crabass, Larry Ellison, about the industry. However, the vendors providing these solutions, the organizations that use them, and the budgets that fund them, all seem pretty happy.

Most of those consulted agreed that we’re at the beginning of something that’s going to be a lot bigger in coming years, so ride out the low profits now. “The [SaaS] shift is compelling to the customer and the vendors are forced to streamline and sell greater volume,” Pombriant noted. “That’s the way of markets. If you wait around until a new paradigm is profitable I guarantee you will miss the market.”

Part of it is just structural, the nature of the beast. “Given the way revenue is recognized by SaaS firms versus traditional perpetual license firms, over the life of the contract versus all up front, SaaS firms will not generate lots of profit until these fast growth opportunities slow,” Gianforte pointed out. “This is due to the way the revenue flywheel spins up in a SaaS firm… I believe you will see margins continue to expand across the entire SaaS industry in well-run firms.”

Of course, as also stated in the article, the Oracle founder has made a nice bit of money from investments like Netsuite and is a major shareholder in Salesforce, widely considered the largest SaaS company. The summary of this article is clear: SaaS is here to stay, it has too many benefits. Some of the most aggressive companies in the space are still running in the red, but that is most by design with an exit strategy in view. Profitability in SaaS is achievable, if that is what is desired.

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