The End of the Maintenance Endgame

When Marc Benioff (Salesforce CEO) calls for the end of maintenance payments (ComputerWorld, PCWorld), he obviously wants to draw attention to one of the apparent advantages of the Software-as-a-Service (SaaS) model of software consumption.

As Judith Hurwitz points out, this advantage is more apparent than real. SaaS vendors like Salesforce still need to maintain their software assets, and to pass the costs of this maintenance to their customers, one way or another.

A significant fraction of software maintenance is required simply to keep up with the latest platforms and standards without delivering any new features or other innovation, and this is especially true for companies that have large portfolios of fragmented software assets.

Companies that fail to innovate may still retain a high percentage of their customers, at least in the short term, because of the high switching costs. This is not just a factor with traditional software products, but can be true of SaaS as well.

One key differentiator here is not between SaaS and more traditional software delivery and pricing, but between software companies that maintain their software assets intelligently and effectively and those that don't. Another key differentiator is between products and services with high switching costs (vendor lock-in) and those with very low switching costs (open market).

As Judith also points out, "many software companies have become increasingly dependent on maintenance revenue to keep revenue growing". In addition, there has been a trend in the software industry of companies acquiring mature software products in order to milk the maintenance revenues, with no real intention of innovation. (See my post on Innovation or Refinement.) This can be regarded as similar to securitization - treating a software product as a financial product, based on its expected income stream.

To the extent that open market SaaS exists, this represents a major challenge to this endgame, and this could possibly mean much quicker termination of declining products and services. But only a chess player would dare to predict how this will play out over time.

SalesForce adoption

Howard Smith (CTO of CSC) has done an analysis of SalesForce.com, provocatively called SalesForce Dot Bomb, in which he uses what he calls Dilution Ratio (the average number of users per customer) as an adoption metric. He suggests that the dilution ratio is a reasonable measure of whether Salesforce is penetrating larger firms. 

I think this means individual users per user organization (although I'm not sure whether this is what his figures actually represent). I think it would make more sense to call this a concentration ratio - the more individuals using SalesForce within a given organization, the higher the concentration. To my ears, the word dilution suggests the exact opposite - spreading a given number of users more thinly across a larger population of non-users. 

Howard's figures show a fairly slow increase of concentration, and he interprets this as problematic for the commercial success of SalesForce in providing services to large enterprise. I am not convinced by this interpretation. User volumes are increasing and concentration is increasing. Isn't this a good thing? 

Technology adoption can be mapped against two axes - individual adoption and collective adoption. Traditional enterprise software vendors have always tried to increase concentration, because this reduces the cost of sales. You don't make money selling one copy of your product to Megacorp Enterprises Inc for a pilot project that requires loads of unpaid customer support. You start to make serious money when Megacorp integrates your product/service into its architecture/standards, and buys a thousand copies for distribution around the organization. That's when the salesman takes a well-earned cruise around the world. Clearly a thousand copies to Megacorp, even at a significant discount, is going to be more profitable (at least in the short term) than a thousand sales to a thousand separate pilot projects.

But traditional software vendors have also paid a lot of attention to "new name" business. You cannot sustain growth indefinitely by increasing the concentration (penetration) within existing customer organizations. Thus in very crude terms, significant growth comes ultimately from new name customers, while profit comes from better concentration in existing customers. In some sectors of the software industry, the vendors with the best concentration are the ones with mature products and trapped customers. (Sometimes it seems as if it's not the products that are treated as cash cows but the customers.) 

Howard is now raising a very interesting question - to what extent is this business model relevant to the new breed of software-as-a-service vendors such as Salesforce? Given that the economics of scale are different in the SaaS world, does this mean that concentration/dilution no longer has such a significant impact on a software company's profitability and commercial viability? Or perhaps concentration/dilution are still relevant, but these concepts now need to be understood differently, against a different kind of reference model? 

Remember that we are talking here about a CRM solution. Let's say that Megacorp Enterprises Inc adopts the Salesforce.com solution for all its customer data. Let's say that Megacorp has 1,500,000 customers, with 250,000 new customers per year. That seems like a much more interesting adoption metric than the number of Megacorp employees who are registered users of the Salesforce service - particularly if some of the "users" of the Salesforce services are lumps of software rather than human beings.  

 

via Barry Briggs