Lawson CEO has head in the clouds

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As anyone within a 100 mile radius of me knows, I'm a crazy NFL football fan.  As you know, the NFL, like all businesses, evolves.  Youngsters might look to recent progress like the popularity of the 3-4 defense or the Patriots' approach to player selection.  Folks of the previous generation recall the advent of Bill Walsh's West Coast offense.  True students of the game probably remember the changes that ensued with quarterback and receiver-friendly rule adjustments during the 1970s and 1980s.

But is there someone out there, perhaps beyond octogenerian status, who decries the pass-happy NFL of today and longs for the golden age of the 1920s, before the advent of the forward pass? If so, that person should meet Harry Debes, CEO of on-premise ERP software vendor Lawson Software. I think the two would get along fabulously.

That's a bit tongue in cheek. In his interview attacking software-as-a-service (SaaS) on ZDNet, Debes makes some valid points including:

1. SaaS companies are less profitable than traditional licensed software companies: "Salesforce.com just has average to below-average profitability." He's totally right. The beautiful "old world" of licensed software allowed you to build software once and sell it over and over again with minimal marginal cost, giving companies like Microsoft crazy-high net profit margins. Customers were left with tons of shelfware, delayed projects and exploding budgets, but the vendors still collected their checks. In the SaaS world (like email archiving or hosted Exchange), we take the burden of running technology off customers' hands, so SaaS vendors get less short-term revenue and profit. This is pure economics. Markets evolve to drive down "above-normal" profit margins over time and shift more value to customers.
2. SaaS is hyped: "People will realize the hype about SaaS companies has been overblown within the next two years." Like any new industry, SaaS will go through its hype cycle. No doubt. But just because something is hyped (e.g., the Internet, mobile phones or Lost), doesn't mean it's not valuable.
3. On-premise solutions lock you in: "The cost of moving is too high. As long as it's working, people are happy to stick with one product." And yes, I think all of us in the SaaS world would agree that customers get locked-in to on-premise software (not sure if he's supporting his point here though :) )

And overall, I'm sure Debes is a very smart and capable guy. You couldn't get to be CEO of such a great and successful company without having a number of strong attributes. As a CEO of a much-smaller company, I'm sure there is a ton that I could learn from Debes.

However, the tone of his interview is that SaaS will never go anywhere and that's where a small army and I would probably beg to differ. In many ways, this is a perfect example of the concept popularized by the Clayton Christensen book The Innovator's Dilemma:

• Small but rapidly-growing market (SaaS)
• Less attractive to entrenched players (on-premise software vendors) than existing markets
• Written off as nothing (too small, not profitable)
• Becomes big over time (3-5 years from now)
• New generation of companies emerge (salesforce.com and ???)

It happened in hard disk drives (as the book discussed). It took place with the introduction of Personal Computers (my dad was a long-time executive at Digital Equipment Corporation, a company that missed this boat). We lived through it in the transition to digital music. And we're seeing it now with the emergence of SaaS.

The obvious disclaimer is that I am a self-admitted SaaS "fanboy" and have written many times on the virtues of SaaS.

As with most arguments in life, however, this is not a black-and-white discussion. To frame it as such makes this a false choice. It's not EITHER SaaS is dead OR on-premise is extinct. I think we're just witnessing the beginning of a mass transformation that will take many years to complete. Don't forget - physical travel agencies, in-person brokerage firms and Blockbuster Video still exist - they're just less relevant now after Orbitz, E*TRADE and Netflix.

For some time, many big companies will be too entrenched with internal biases or complex processes to adopt SaaS, so its initial value will come from serving the mid to long "tail" of customers who are more willing to embrace on-demand. So Debes is right that large enterprises aren't all running to SaaS any time soon. Luckily there are enough small-to-mid-sized organizations that have been unsatisfied by on-premise technology over the years that the market is very robust (robust enough to make us profitable for several years running, in fact).

Fundamentally, SaaS makes things possible that never were there before, including:

• Near-immediate time-to-value
• Pay-as-you-go with transparent cost of ownership
  
• Integrate in the cloud

So it's not just about attacking the on-premise market. Instead this is about something bigger - creating a new, broader and better market than the one that existed before. To me, that's the exciting part of my job - that we can create value for companies that never existed previously.

Apparently Debes has different aspirations for his company's value:

"Getting signed up as a SaaS customer is fast, but getting out is just as fast. Whereas traditional software is like cocaine--you're hooked. It's too difficult and expensive to switch providers once you've invested in one. If it were easier to jump ship, a lot of people would've hit the eject button on SAP a long time ago."

I don't know about you, but my mom didn't raise me to be no drug dealer. :) And I love it when my Pittsburgh Steelers throw downfield. I guess I'm just caught up in the hype.