Saugatuck Research is out on October 8, 2009 with one of its periodic hallelujah pieces about a so-called class of enterprise software suppliers it calls Software as a Service (SaaS) software providers. (This link requires you to sign in but I believe there is no charge to see the summary.) To be fair, Saugatuck is not the only firm putting out this poorly structured view of the enterprise software industry. Look at Saugatuck's and similar SaaS-slanted research very skeptically from an information technology (IT) investment and IT market analysis point of view.
According to Saugatuck, the SaaS class is posited as different than “On-Premise software providers,” which it periodically also calls "ISVs." The SaaS class is regularly described as a new phenomenon. In one Saugatuck report, this SaaS class is even said to be “…Starting to Feel the Effects of Tough Economy” (see Saugatuck report RA-602, published on 28 May 2009). But the October 2009 announcement says,
“By YE2010, our SaaS basket will be growing at a 20 percent year-over-year rate (with the slope suggesting a potential path to achieve 30 percent or higher segment performance in 2011).”
There is no better way to understand the Saugatuck research’s flaws than to look at its so-called “baskets” of different classes of enterprise software suppliers
On-Premise ISV Basket:
• Autodesk (ADSK)
• BMC (BMC)
• Compuware (CPWR)
• Epicor (EPIC)
• Lawson (LWSN)
• Oracle (ORCL)
• SAP (SAP)
SaaS Market Basket:
• Blackboard (BBBB)
• Concur (CNQR)
• DemandTec (DMAN)
• Kenexa (KNXA)
• NetSuite (N)
• RightNow (RNOW)
• Salesforce.com (CRM)
• SuccessFactors (SFSF)
• Taleo (TLEO)
• Ultimate Software (ULTI)
It is the most misleading bit of cherry picking and revisionism I’ve seen among this sort of SaaS fanboy research. It is absurd to include BMC and Compuware in a listing that is otherwise made up of enterprise applications suppliers. Or if there were any logic in including BMC and Compuware, why not include Red Hat (RHAT) and VMware (VMW) also? Maybe Saugatuck left them off because it would skew the results of Saugatuck’s share-price comparisons in a direction that invalidates Saugatuck theories?
It is equally absurd for Saugatuck to leave off Microsoft (MSFT) and IBM from a list that is supposed to accurately portray the so-called “on-premise software community.” Saugutuck says that’s because the two market leaders do not segregate “their reported revenues between new license sales, maintenance and services revenues” but of course neither do most of the so-called SaaS providers. So you cannot compare apples to apples.
And on which list should I put Google (GOOG)?
Then you have the research's logic problem that all of the so-called on premise software community also offers its software functionality as a service--that is, SaaS--and has done so for years. In fact, although I don’t buy Oracle's actual claimed dollar amount, I agree directionally with Oracle’s claim that it is already the number-two provider of software delivered via SaaS delivery mechanisms. Of course that is what SaaS is: an enterprise-software delivery mechanism, not a market. That misunderstanding is the biggest flaw in Saugatuck’s and similar SaaS research perspectives.
Conversely, as explained in my IT Business Edge research, almost all of the so-called SaaS basket entrants also offer or used to offer “on-premise software.” That’s another way to say they are all or mostly also 10 or more years old so any share-price time-series analysis similar to that included in the Saugatuck research should span a few decades, not a few quarters.
There are all kinds of finer points to watch for but bottom line: don’t use this stuff to decide on how you invest in the enterprise software market.
-- Dennis Byron