De-SaaS-ification part 2

On February 18, 2016, in HRExaminer, John Sumser, by John Sumser

photo of office building with white clouds over blue sky in HRExaminer article, De-Saas-ification part 2

Commodification is a bad way to make your company different from the competition.

Yesterday, we began what will be a long discussion about changing software valuation approaches and what that means for HR leaders. As the market begins to give software companies more realistic performance appraisals, some obvious things will happen. Mind you, this is because enterprise software is now a mature industry with predictable rhythms. Gone are the days when money rained on entrepreneurs just because they stood in the right place.

Take a scan through this hour long ‘fireside chat’ with Marc Andreesson. He’s the billionaire who launched Netscape (the original web browser) as a young man. He’s now a powerful head of an investment firm. In the talk, near the middle, he lets us in on an amazing secret.

It’s not the idea that makes the difference when he is choosing companies to invest in. What actually matters is the availability of the right investment bankers to nurture the company. Contrary to the public fantasy, great ideas are a dime a dozen. Great bankers are more like a billion a dozen.

There goes the whole idea that what the market provides is innovation. Really, it’s just some meta gamblers who are looking over the shoulders of the actual card players. They bet on the hands that they understand… when they are available to understand it.

We are watching a generation of supposedly great ideas circle their way around the in-process-flush. They are built with bankers who agreed to champion the project by very smart people with a good theory about HR and Recruiting. Great theories no experience.

A couple of years from now, we may well wish they’d never come to visit.

As long as software companies were valued at a significant premium based on their license revenues, all sorts of strange contortions became the norm. Betting on the idea that wealth creation had to do with business model rather than value delivered, many companies were formed with a basic architecture:

  • Get a little (minimum viable) idea
  • Sell it to users who are willing to complain the little idea into an adequate idea
  • Sell that idea to a group of users who are willing to do the work of implementation without a lot of guidance
  • Sell the company to the public markets or an acquirer
  • Let the downstream team figure out how to live with the implementation problem.

This is the SaaS approach. It is the old technology. It didn’t really work very well and is in the early stages of being abandoned because the valuation models are being transformed.

Today, I spoke with yet another old school company who is in the process of transforming itself into a technology company. There are a ton of them. They all say, ‘We’re moving to a subscription model. It’s going to become a SaaS company.”

I said, “Why would you want to tell the market that your new idea is to do the old thing? Everyone who ran down that road discovered it was a cul de sac.  Why don’t you try to figure out the next thing and chase that. The market wants the new thing, not the old thing. SaaS just died on the vine.”

The idea that a company should exist without a direct tie to all of its customers over the course of its useful life is called wholesale. When the customer experience is left in the hands of the retailer who is divorced from the maker and the middleman, you get department stores. Innovation, no matter how much you want to pretend, simply doesn’t flow down that sort of pipe. Wholesale is a great way to move commodities.

Commodification is a bad way to make your company different from the competition.

The Apple retail model flourishes precisely because the tie between the company and the customer is completely intact. They simply don’t buy into the SaaS-ification of business. You can’t deliver solid customer experience that way. Think Tesla.

In future columns, we’ll look at the ways this dynamic affects the development and delivery of HR Software.

Read previous post:
Hold On To Your Wallet (De-SaaS-ification 1)

A more accurate title might have been, "Why HR Pros should care about software company valuations."