Free Like a Puppy

The other day, I listened to a venture capitalist talk about the enterprise software market and there was a terrific line of questions from the audience: Is there any conflict between SaaS and the open-source software model? Can enterprises get open-source solutions easier and deploy them more cost-effectively than third-party commercial software - even SaaS solutions? Does open source diminish the SaaS cost advantage?

Not so fast. The speaker brought up an Oracle study demonstrating that for every $1 of code written it costs another $4 to own. While the open-source model is huge and is here to stay, it’s important to understand the total cost of ownership. That that “free” open source software is "free like a puppy." After the veterinarian bills, new carpeting, licenses, supplies/toys, food, - and, in my unlucky case, more new carpeting - a “free” puppy costs you about $1,000 per year. If you own that puppy for 15 years, that’s a $15K free puppy.

The speaker was a big supporter of the SaaS model and went into some detail about its value to the enterprise – saying many of the things you’ve heard me talk about before. But that didn’t stop him from pointing out some of the problems enterprises might have. First there's that inherent loss of control that comes from having a third party operate and maintain your business-critical application. However, he doesn't believe that “control” is as important to enterprises anymore. He pointed out that it certainly hasn’t stopped companies like Merrill Lynch, Wachovia, and Cisco from adopting SaaS systems.

Second there are features. New entrants have more/newer features than established vendors, and that might be important for some enterprises. However, it’s so costly that the 80-20 rule applies: if you can get 80 percent of what you want in a “faster, better, cheaper” mode, most enterprises will gladly accept that tradeoff. And, of course, it’s usually only a matter of time before those features ripple through the market anyway. One of the most persuasive proof points: Tom Seibel was an investor of Salesforce.com - so knew the SaaS model well. Yet, he still couldn't stop it.

Third, there's customization – the next new wave in SaaS. SaaS vendors are devoting more resources to architecting their products to support “standard-custom” implementations that can be supported through subsequent upgrade cycles. That’s the approach we’re taking with our Activity Competency Center. One of the big benefits is that enterprises can acquire this customization outside of the IT budget in most cases. What about integration – that’s always a challenge, right? The truth is, new technologies are eliminating the integration headaches we endured over the past years. What was problematic five years ago is very straightforward today.

I finally had a chance to ask him a question directly – about how enterprises account for software. I pointed out that enterprises often capitalize their software purchases (or internal development) over several years but that SaaS software is typically a top-line expense. Do accounting treatments create a consistent sales objection for his portfolio companies – and how do they respond?

He answered that – just like a free puppy – the upfront price for software really doesn't matter. You can charge $1 and there will still be a lengthy decision cycle, numerous meetings with third-party consultants to choose the right vendor, and significant implementation, overhead, and maintenance costs. Software is expensive - even when it’s free.

In many traditional software license negotiations, buyers add options until the initial license fee grows and there's a significant upfront cost. Compare that approach to the ability to offer a way to eliminate all of that upfront risk. With SaaS, an enterprise can try out 10 seats, and incrementally scale up – on an as-needed basis once the solution demonstrates its value - until the deployment is the same size as the traditional all-risk-upfront offer.

I want to be able to do that and I think we can for our ChannelMaster POS and ChannelMaster Advisor products. I'd love to do that for ChannelMaster Production as well. I want to look a lender in the eye and say, "Sure, try a few loans out. Take it for a spin. Originate a loan, order docs, underwrite it, get MI. Go ahead, fund a few. Let us know what you think..."

This is no long-term pipe dream – it’s the model that Dorado is committed to achieving and delivering. It’s not necessarily intellectual property - although that's important. I think that operational acumen and excellence play equally important roles – and that’s where we intend to press our advantage.

Take care,
Dain

Dain Ehring
CEO Dorado Corporation
dehring@dorado.com
650-227-7330