SaaS is the way forward
Stephen Georgiadis suggests that channel companies not involved in SaaS yet should really consider it
Some say we are only in the infancy of cloud computing, as shown for example by statistics that suggest most computer processing is still carried out in a conventional "on-premise" form.
To judge by the number of growing, profitable, mid-market providers of third-party datacentre-hosted computing, by the likes of Pulsant, Six Degrees, et al, a rising tide may be lifting all boats in the IT sector.
This phenomenon may have room to grow for some time yet although competition from high volume and low added-value providers of capacity -- such as Amazon or Google -- as well as from the proliferation of mid-market players often backed by private equity is intensifying.
Consolidation in the middle market will increase this year as these private-equity-backed companies look to realise what they need to do while things are looking good -- before the pressure starts to bear down on prices and margins.
In the SaaS arena in particular, there is a lot of confusion (and hype), not least around what a SaaS company actually is. Cloud is a necessary but not sufficient requirement for SaaS. True SaaS requires a single version, multi-tenanted offering sold, usually, by a recurring monthly, quarterly, or annual subscription.
Provided the software is high quality, secure and easy to use, true SaaS providers can grow their revenues very quickly, when compared to conventional, old style software, for a number of reasons.
SaaS is usually cheaper (at least upfront) and it can be deployed, modified, updated and integrated with other systems much more quickly and efficiently and across multiple locations.
This high rate of growth, often at the expense of slower moving, more conventional software providers, is one of several reasons for the very high valuations accorded to SaaS businesses.
Others include that the monthly subscription model tends to result in a profit and loss account that appears to understate the profits.
Even though these may be underwritten by a contract for years into the future and underpinned by upfront cash payments, they can only be reported through the profit-and-loss account as earned, and until then these revenues can only appear as deferred revenue.
A further reason is that many of the larger, cash-rich, conventional software dinosaurs have found it difficult to accept that the landscape is changing in favour of SaaS, and are now having to scramble to catch up.
One obvious way to catch up is via a mergers and acquisition programme. And where large companies with lots of cash compete with each other, prices get driven up very far, very fast. In some cases the pricing has become truly eye-popping.
At least these valuations represent multiples of fast-growing revenues as opposed to some of the ridiculous metrics applied during the last tech bubble -- remember "eyeballs"? -- and at some stage, gravity will reassert itself.
As SaaS businesses grow, data security will become increasingly important, however. The cyber-prevention market is already a booming industry.
Stephen Georgiadis is managing director and head of technology at Altium