Internet Find: Peter Levine On How SaaS is Shaking Up the Enterprise IT Market

The latest blog post from Peter Levine is part one of his SaaS manifesto. Here, he discusses the market impact of what he calls the “departmentalization of IT”: business departments increasingly procuring SaaS solutions on their own, bypassing the IT department and the CIO.

In enterprise IT, this is not a fringe phenomenon any more:

“Today, the new buyer is the operating department—HR, sales, development, marketing—and the decisions of which technologies to procure are no longer solely centralized through the CIO. In fact, nearly 50% of all IT purchasing decisions are now being influenced and/or made by an operating department, says an August 2013 study by Enterprise Strategy Group, as these departments look for purpose-built applications.”

Powerful SaaS solutions have enabled this development: SaaS solutions make it much easier for business departments to bypass the IT department when procuring a new IT solution.

This change in buyer behavior has huge consequences for the entire enterprise IT market: in the past, major enterprise software vendors like SAP and Oracle were deeply entrenched in the IT department and newcomers in the enterprise software business usually had to “peacefully co-exist” with those industry heavyweights in order to survive.

This constellation also made it rather easy for the big incumbents to successfully enter newly emerging enterprise software markets, as they could leverage their sales force and their close relationships with the IT department to do just that.

However, in the new world order, a stronghold on the IT department does not guarantee success any more.

But then, why is it so difficult for the established vendors to change their ways and to do as the SaaS vendors do? Why don’t they offer SaaS solutions and sell them directly to business departments?

Peter Levine identifies three barriers that hinder established enterprise software vendors to do that:

  1. It is very difficult to switch from a license-based business model to a subscription-based business model: during the transition period, it looks like revenues are tanking and that’s just not something that a big, established software vendor can afford.
  2. SaaS solutions frequently release updates . This requires different methodologies and processes in development, quality assurance and rollout than the traditional packaged software business model. These processes are hard to change – and it’s even harder to support these two different flavors of processes in parallel.
  3. SaaS solutions lend themselves to a different type of sales process – where customers can much more easily test a solution and evaluate its business value before committing to it. Again, a huge process change would be required of the established vendors to adapt to this different sales environment.

On the other hand, two characteristics of SaaS solutions  make it much easier for new SaaS companies to get a foothold in enterprise departments:

  1. With SaaS solutions, it’s often rather easy to upsell additional functionality or to extend the subscription to a larger user base inside a customer company. SaaS vendors know that and have honed their capabilities to first enter a customer account with a small footprint, and to do this upsell later. Traditional enterprise software vendors are  not set up to sell this way.
  2. Vendors of SaaS solutions  build deep domain knowledge and close relationships with the departments they are selling to. That allows them to pass by the big, established vendors that are still predominantly bonding with the IT department. Vendor lock-in does not work any more as a mechanism to ward off new entrants.

Peter Levine’s blog post is definitely worth reading – and I’m looking forward to the next article in his series, which will discuss the role and set-up of the sales organization in more detail.

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