Time for VCs to Reevaluate the SaaS Market?

I’m just reading an interesting interview with the CEO of enterprise resource planning giant Lawson Software, Harry Debes, who is predicting that customers’ love affair with the software-as-a-service model will soon end.

It’s in his interests to pooh-pooh SaaS, since the future of Lawson relies on customers continuing to pay for its expensive software and systems integration services up front. At the same time, Debes’ arguments against SaaS make for compelling reading — especially for VCs with SaaS portfolio companies — or those contemplating funding one.

When ZDNet reporter Victoria Ho asks Debes if the business case for SaaS isn’t too irresistibly straightforward to fail, for example, he says:

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.

Ho then asks if Lawson is looking to “lock people in,” to which Debes responds:

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.

The rest of the interview is here: