An interesting piece of research from the Synergy Research Group reports SaaS Enterprise spending growing with the market expected to triple in 5 years. Microsoft is competing for revenue leadership against Salesforce and other large vendors are also making revenue gains. That said there’s no comparison of product line which means that Salesforce marketing, sales and service is probably being compared to Office365 which is difficult to draw too many conclusions.
What is interesting, is how Microsoft and others are changing their business models to deal with the SaaS world. On-premise generally works with a lump sum for a perpetual license and a percentage of that sum paid annually for support. SaaS or cloud is generally $/user/month, frequently paid annually in advance. The diagram below is unoriginal but explains the concept well.
When you start your business based on lump sum and support it’s very difficult to quickly change to the cloud model without seeing a significant drop in revenue. The on-premise lump sum on day one could now be spread over five financial years. True, the cloud vendors receive the revenue in the longer term but when you report revenue quarterly you have to show continual growth otherwise the stock value is negatively effected. How does your revenue take that reduction when you switch to the cloud? As Salesforce and others had the “correct” model from inception they don’t have to concern themselves. Also interesting to note, according to Synergy Research, Microsoft’s SaaS revenue is 8% of total software revenues.
Time will tell how quickly the large software vendors can transform from on-premise sales to cloud sales. Many factors need to be considered from revenue recognition to sales bonuses, merely changing delivery method and commercial terms are pieces of a complicated jigsaw. What is clear is they’ll struggle to move too fast without risking a short term revenue decline.