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Lawson's Harry Debes: SaaS Industry Will Collapse in Two Years

by: Daya Baran August 28, 2008 | about stocks: CRM / LWSN / N / ORCL / SAP / SWH    

Daya Baran

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Lawson Software’s (LWSN) chief executive, Harry Debes, believes software as a service will collapse in two years.

In an interview, Debes told ZDNet Asia why SaaS is history repeating itself, and why his company is not going down the same path as its bigger competitors that have jumped aboard the ‘on-demand’ bandwagon.

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Q [ZDNet]: All the other big players are going on-demand. Is cloud computing the next big thing?

A [Debbes]: This on-demand, SaaS phenomenon is something I’ve lived through three times in my career now. The first time, it was called ’service bureaux’. The second time, it was ‘application service providers’, and now it’s called ‘SaaS’.

But it’s pretty much the same thing, and my prediction is that it’ll go the same way as the other two have gone: nowhere.

SaaS is not God’s gift to the software industry or customer community. The hype is based on one company in the software industry having modest success. Salesforce.com just has average to below-average profitability.

People will realise the hype about SaaS companies has been overblown within the next two years.

An industry has to have more than just one poster child to overhaul the system. One day Salesforce.com (CRM) will not deliver its growth projections, and its stock price will tumble in a big hurry. Then, the rest of the [SaaS] industry will collapse.

Q: Won’t people avoid the mistakes of ‘previous’ SaaS incarnations?

A: People are stupid. History has shown it repeats itself, and people make the same mistakes.

Q: So it’s safe to assume Lawson does not have a SaaS strategy?

A: Actually, the original design three years ago for one of our better products was SaaS. In 2005, we started building a human capital management product.

At that point, people were talking about SaaS. There was a lot of buzz around it, so we decided that, in case it was going somewhere, we’d build the software for the SaaS model.

But, as we did the maths, we realized we could get killed. It was going to take us seven to 10 years before we made any money. That’s nonsense. So we reversed our plans. I’m very glad that happened because now we can sell the software in both models. We wouldn’t have to wait 10 years to make a profit.

Q: But what about your competitors offering SaaS models?

A: [Oracle (ORCL) CEO] Larry Ellison has the same perspective as I do. He accidentally funded the CRM product and NetSuite (N). He didn’t really mean to. They’ve had small successes but, overall, they’ve been spectacularly unsuccessful. [Larry Ellison: No Money In Saas - Google Is The Risk]

And SAP’s (SAP) Business ByDesign is a disaster. SAP said it would have 10,000 customers [for ByDesign] within a couple of years. And yet they have less than 100 today, after all that hype and marketing.

We use Salesforce.com, and I like it. But I would’ve bought the product even if it wasn’t SaaS. The success of Salesforce.com, in my opinion, has to do with their product being good, not because it’s SaaS.

Q: Theoretically, the business case for SaaS seems fairly straightforward.

A: Yes, but, because all your costs are up front and your revenue is over a five-year period, the more you sell, the more you lose.

You don’t break even till the four-and-a-half-year mark, but here’s a bigger problem: there’s no guarantee that that customer is still going to be yours in four years’ time.

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.

Q: So is Lawson looking to lock people in, in the same way?

A: It isn’t about locking people in. People lock themselves in. They see the software, like it and want it. This is true of all professional software.

The cost of moving is too high. As long as it’s working, people are happy to stick with one product.

When the sunk costs have been fully depreciated, customers effectively run the software for free, thereafter. Whereas, if they went to Salesforce.com, it’d cost them a million a year because they’re paying for ongoing licensing and maintenance.

SaaS is just a financing option for the customer. For that, we offer a hosting service. If the customer pays [over a period of time] through a financing entity, it’s exactly the same [experience] as SaaS.

Q: What is your plan for Asia, a region with a large proportion of SMEs? Many don’t have the capital for a big, upfront investment in ERP software.

A: There are still several thousand companies that fall into the revenue range of between 50 million and a couple of billion dollars.

We sell into target verticals, not generically. Frankly, we can’t compete against SAP or even Microsoft by being generic. They can outspend us and outmarket us. By being vertical-specific, that’s the way we are levelling the playing field.

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This article has 17 comments:

  •  
    Aug 28 10:51 AM
    I've never seen or read any interviews with this guy before. I think I have a new man-crush. Love the blunt straight talk for a change.
    Reply
  •  
    Aug 28 11:38 AM
    Ellison says the same thing. SaaS is a hard business - but its not impossible like Debes says.

    Look at Thomson or Bloomberg. These guys are SaaS too - and enormously successful.

    Reply
  •  
    Aug 28 02:16 PM
    Did the CEO of a software company just say that "people are stupid" and equate his software with "cocaine". Hmmm. Interesting that Lawson isn't doing better with this genius running the show.
    Reply
  •  
    Aug 28 03:02 PM
    Harry Debes is completely wrong. He has a vested interest in playing down SaaS because it will collapse his business. Just watch Lawson's stock. Harry's only solution is to get acquired.
    Reply
  •  
    Aug 28 03:52 PM
    Most rational people detest the idea of being “hooked” on anything. And when in such a situation, humans actively seek to unload that which holds and confines them. It is true of cocaine and it is equally true of traditional license based software. SaaS will be successful because the underlying economic benefits to the end user favors SaaS over the traditional license based model. Whether SaaS companies can generate superior returns over conventional models is perhaps questionable. However the absolute economic value that SaaS delivers to the end user is quantifiable and indisputable. In the end, this will drive the continued adoption and success of the SaaS model and it is for this reason that the conventional model’s days are numbered.

    I hope there are more CEOs out there with the same view. Taking their customers is like shooting fish in a barrel.
    John Grabski
    CEO
    ClearMomentum

    Reply
  •  
    Aug 28 05:23 PM
    Daya - great article. Thanks for posting it.

    It's funny Debes has the perspective, there was tymnet, there was Ask ManMan .... , . People think the cloud idea is something new.

    I'm not sure I agree with Debes with how easy it is to stop using Saas. If you just put in 8000 customers I don't think you'd lightly make the decision to use something else.

    My big question with Saas is how you do change control. I am an IT person. So Saleforce is sitting there with 5000 different customers, each with their own installation, presumably starting on the same release. And some of those customers are very fussy about anything changing in their application. So how do you make any improvement to the base system given all the technical issues and the fact that some customers might try to veto a change you want to make.
    Reply
  •  
    Aug 28 06:14 PM
    Flash,

    They make improvements and changes all the time. They coordinate carefully with their customer to manage the process in as efficient and non-disruptive a way as possible.

    They also take great pains to design and implement enhancements or features in order to cause the least disruption to the customer. Most packaged software providers go to these same lengths. No one wants to distract the customer needlessly - regardless of whether they provide a leveraged service, or a licensed package.

    Change control isn't any harder in SaaS - it just means the SaaS provider bears part of the cost of change. It comes out of their operating margin - not the customer's. This is why SaaS is a hard business - which is what I meant when I said that Ellison says the same thing. SaaS is hard. Software is not cocaine, and people are not dumb - but SaaS is hard.

    Customers can't 'veto' a change in a leveraged service (be it software or the gas company), but if you read your EULA for your on-premise software, you can't really veto a change there either. If the provider says you have to take the upgrade, then you have to take the upgrade or void your access to support, or possibly even your license.

    The important thing to take from this article is not Debes' crazy hyperbole about cocaine. Its important to know, as an investor or purchaser of SaaS, that the operating margin for the provider is VERY different than the operating margin for licensed on-premise software.
    Reply
  •  
    Aug 28 06:20 PM
    Colin,

    I guess it's obvious but I'm not seeing it. Which has better margins, Saas or on-premise. I'm short crm. If you say Saas I'm going to laugh. 100,000 people at msft kill themselves to do hard things and the stock has gone no where for the last 8 years. and I think msft has monopoly power in the marketplace. crm has a p to e of 300 and seems to keep going up even though they make 8 cents a share. Something doesn't make sense.
    Reply
  •  
    Aug 28 06:23 PM
    Colin,

    change my prior comment to "if you say on-premise"
    ... Flash
    Reply
  •  
    Aug 29 09:55 AM
    GAAP profits, P/Es, PEG ratios...do you think private equity and other intelligent investors put an ounce of faith in these metrics. Those are nice tools for PMs managing 100+ stocks to make quick decisions. The true value of a business it the excess cash it generates above and beyond its need for cash. SaaS will ultimately converge to become a scale required industry. I'm invested in smaller providers that will get acquired (CALD, DMAN, SLRY) because I think that's the better road in the short-run, in the long-run when it becomes clearer (GOOG, MSFT, CRM, someone we'e never heard of) who will survive and flourish it will be a great growth and excess generator for years to come become of its scale advantage.
    Reply
  •  
    Aug 29 11:28 AM
    I should dump Lawson from my portfolio.
    Reply
  •  
    Aug 29 03:36 PM
    Flash,

    In the interest of full disclosure - I work at ORCL in one of their SaaS operations. I do not speak for ORCL in any capacity. I hold shares in ORCL, I do not hold CRM.

    I have no access to material information about ORCL and everything in these comments are my own opinion and do not reflect the opinion of my employer.

    I would say that MSFT is not an apt analogy.

    CRM's profit is pretty much non-existent, so I know that the profit margin at MSFT is higher. I would also guess that the rev/headcount number at MSFT is higher than at CRM. CRM - after option expense - does not return $0.08 a share.

    While MSFT hasn't seen its stock rise, its market cap is many times CRM's and MSFT has paid a significant dividend recently. As for the 300x multiple - people are paying are betting on 'long tail' profitability and the CRM 'growth story'.

    As for broad 'model' comparisons between SaaS and on-prem - I don't know who has better margins. I think that, investors looking at SaaS services should measure those investments on the same set of metrics they measure a telco on (ARPU, churn, etc).

    I agree with Nom De Plum's point. Its not 'impossible' to make money in subscription based services. You either need premium pricing (like Thomson) or you need lots of scale (millions of paying customers).

    Again - this is just my personal opinion.


    Colin
    Reply
  •  
    Aug 30 06:23 PM
    Hello,

    I think the Lawson's CEO, Mr Debes is absolutely right. I think all the major ERP/SCM/CRM vendors are saying the same thing the only difference is that Mr. Debes is a straight shooter. Based on a recent article in Financial Times (www.ft.com/cms/s/0/33c...), the SAAS business can be summed into three things >>> attracting new customers, generating subscription revenue and customer replacement. The first and last activity of this business is always a over-head on the companies balance sheet, selling a hyped product to a customer. The subcription business is driven by how much value is generated for the customer and is always a questionable issue.

    With the global economy heading south and companies managing their cost to the n'th detail, I think we have a hurricane "Gustav" on the door-steps for the SAAS companies. And dont behold, even the company that pioneered the SAAS mantra (Salesforce.com) is forecasting dark clouds in Q3 and Q4' 08.
    Reply
  •  
    Aug 31 12:23 AM
    Traditionally, there 3 important source of revenue in solution software are - User license, consulting and software support. Infrastructure maintenance has never been part of a Software Solution provider. But, with SaaS, the provider has to bundle this, and this is recovered on recurring basis overtime. In software business,infrastructur... has to be constantly upgraded and maintained. Hence, what is recovered over time is also lost over time. Also, as User entities grow, so also the complexity.
    Perhaps, the complexity of it all is 'looming' large. It is one thing to talk about 'Utility model' in software, but the reality seems to tell a different story.
    Reply
  •  
    Sep 02 07:25 PM
    Oracle's stock growth for the year is now down to 4.0% for the year. A loss of 8.5% growth (the growth was 12.5%)since the announcement of Oracle's CEO pay of 83.6 million. Avon's one year growth is over 30%. Avon's woman CEO makes 5.1 million. Is Oracle's CEO overpaid?


    Reply
  •  
    Sep 05 04:32 PM
    Debbes is in denial. He is desperately trying to stave off the inevitable because he cannot get from A to B with all that baggage and legacy code. Technology changes and allows/requires changes to the business model.

    Timesharing went out of fashion because computers became more affordable and less scarce. Application Service Providers were a failed iteration of SaaS. In fact, many legacy software providers like QAD and Epicor are trying to revive the old ASP model to compete with true multi-tenant SaaS solutions that are winning in the marketplace. They are saying "me too" and hosting single-tenant instances in third party datacenters. That only adds costs and complexity to the vendor-customer relationship.

    Several of Debbes' comments are true but cut the other way. Yes, the application has to work for the customer. Multi-tenant systems built on modern technology can deliver changes to the market faster than a company that has to worry about versions, different databases, operating systems, etc. Enterprise applications are sticky. Good SaaS solutions will bring superior profits over time. Customers will stay with them because the software evolves with them.

    I run a fast-growing, privately-held SaaS ERP provider that wins against the established crowd every day - not because it is SaaS, but because it is a better product - and it gets better every day.

    Customers may not be asking their provider for SaaS, but once they learn about it they see that it just makes sense. There is money to be made in SaaS. It will be at the expense of companies under the leadership of people like Debbes.

    Mark Symonds
    plex.com
    Plexus Online
    Reply
  •  
    Sep 08 12:35 PM
    First, this type of arrogance and willful blindness to a massive trend foreshadows significant business problems for Mr. Debes and Lawson. Think DEC (PCs will never replace minicomputers) and all the software companies that missed the DOS to Windows wave for whatever reason.

    Re: Mr. Debes remark that "people are stupid"... I couldn't disagree more, especially when it comes to SaaS customers. They know what they want and they're adopting SaaS solutions across the globe and at a rapid pace. Here at projjex.com we receive a constant flow of intelligent feedback and great ideas from our customers. Nice try Harry but belittling your customers isn't going to derail the SaaS locomotive!

    Alex Glassey
    projjex.com
    glasseyonsaas.typepad....
    Reply
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