If you are an entrepreneur seeking to create a new software product, these days by default you choose the Software as a Service model. This model offers lots of advantages and eventually will likely be the dominant model. But it should be pointed out that most software is not delivered using the SaaS model. What interests me is what will happen between now and when SaaS takes over, a process that will take a decade or longer. For companies selling software right now, does the SaaS model leave out parts of the addressable market? What should vendors do about that?
These are more than academic questions. The global software market, according to Gartner, was just over $400 billion in 2013. According to some estimates, about 10 percent of that market will be served by the SaaS business model in 2015. But if you spend most of your time talking to people in Silicon Valley, you would have the idea that this transition has already occurred. For example, Adrian Cockcroft, former VP of Engineering at Netflix and now a VC at Battery Ventures, said in an article in Gigaom (“Was 2014 the end of enterprise computing?”) that the major enterprise software vendors are failing to grow and could be replaced by open source software that cost one tenth as much.
Perhaps that’s true for some markets, but it isn’t for all. Open source has been a killer force for software infrastructure, but far less impactful for business applications. In the mean time, there is a lot of money to be made serving customers the way they want to be served.
I’m going to examine these questions by looking at what Teradata is doing with the Teradata Integrated Marketing Cloud. Teradata offers a comprehensive three-tiered product that aims to address the entire addressable market. The software for each segment is provided using either a SaaS or On-Premise delivery model, or in some cases both.
In an interview, Darryl McDonald, president, Teradata Marketing Applications, explained that through acquisitions and internal development Teradata has assembled different collections of applications for SMBs, the mid market, large enterprises. Teradata has created a strategy that reconciles the power of SaaS for SMBs and the mid market with the need for the vast functional footprint and choice of delivery models needed by the enterprise. Buyers and makers of software should be interested in figuring out the strengths and weaknesses of strategy as they make plans for the future.
Observations about SaaS and Enterprise Software
What interests me is the difference between what the largest enterprise software offers and the smaller functional footprint of the SaaS vendors. The classic ERP systems of the world such as SAP and Oracle, offer a huge, wide footprint of functionality that over time has expanded to meet the needs of as much as 20 percent of enterprise processes, according to research published by SAP in the book "Business Process Management - the SAP Roadmap". Over the years, the vendors, SAP especially, have gotten really good at offering ready made configurations of their software for specific industries.
Purchasers of enterprise software find a way to configure the massive airplane dashboard of capabilities to their needs. For ERP at least, there is little concentration of requirements. Everyone needs a different 20 percent of the total functionality offered. For a SaaS companies to succeed with their smaller functional footprint, there needs to be a concentration of requirements. The entire market needs to want the same 20 percent. One of the reasons that Salesforce.com has grown far faster than the SaaS ERP vendors is that the CRM market has a high concentration of requirements.
The SaaS companies are playing a different game than traditional enterprise software vendors. I’m not sure why yet, but it seems that the demands of creating SaaS software tend to narrow the functional footprint. This could be because the SaaS vendors have one version of the software for which they take full responsibility. SaaS vendors do the hosting, the patching, and the upgrades. In addition, when a SaaS vendor uses a multi-tenant architecture that may also narrow the focus. It could be because SaaS companies have to focus their resources on the entire vertical stack, including hardware, which may make the product move forward with more focus.
In general, the SaaS companies have created software that has achieved much higher ease of use and configurability than enterprise software. Product designers at Salesforce.com, for example, used consumer software as the models for their user experience, and created a system that can be configured even by beginners.
But when you look at the functional footprint of Salesforce.com it is still significantly smaller than the breadth of what SAP or Oracle offer in their CRM products which serve both the automation needed to execute marketing and the needs of managing a large organization. Salesforce.com’s footprint doesn’t look as small when you take into account the ecosystem, but SAP and Oracle have ecosystems as well.
The Logic of the Teradata Integrated Marketing Cloud
Given these observations what is a vendor that seeks to serve the largest possible market to do? The structure of the Teradata Integrated Marketing Cloud provides an answer.
For a detailed look at what capabilities are needed see the article “What is your Marketing Technology Personality?” where I examine what capabilities are needed by SMBs, the mid-market, and the enterprise.
Teradata has acquired and developed a large portfolio of software to support the needs of marketers in all three of those segments:
<) SMBs who get single function capabilities of limited scale based on SaaS model.
<) Mid-market who get scalable and integrated software to run end to end multi-channel campaigns and manage assets based on the SaaS model. Some of the mid-market software can be delivered on-premise.
<) Enterprise customers who get software delivered both on-premise and via SaaS that can address the needs of a large marketing organization that needs to plan, coordinate, and execute numerous campaigns across many different brands and products lines.
The enterprise product, which has the widest functional footprint and deepest integration between components, is aimed at the Fortune 3,000 companies, which have long been Teradata’s sweet spot. This market, McDonald says, is interested in efficiency, automation, and executing an end-to-end process staffed by hundreds or thousands of people. The customers for the enterprise product are often in regulated industries that don’t allow customer data to go off site. Even if there are not restrictions on data, such customers are often more comfortable with an on-premise model.
So, at the enterprise level, Teradata competes with the large on-premise applications from IBM, Oracle, and SAP. The license sales at this level can be in the millions of dollars. Ignoring this part of the market leaves a lot of money on the table.
The mid-market is less interested in end-to-end, deep integration of a large organization and is much more comfortable with the SaaS model. Teradata meets this need either with a simplified hosted version of its enterprise product or with a product developed from the ground up as SaaS. Larger organizations or those with super advanced schemes for marketing automation tend to go for the hosted enterprise version. The SaaS product offers a streamlined set of functionality that has some integration.
At the SMB end of the market, companies are interested in choosing one of a bouquet of capabilities. Some customers may use just the capabilities for email marketing or social media or many of them together. Integration isn’t as important.
Teradata provisions these levels with as software platform created from several different acquisitions. McDonald said the company focuses on creating a seamless user experience at whatever level a customer uses. McDonald said Teradata offers superior analytics capabilities for all three levels of product and a full suite of professional and creative services.
A Breakdown of Teradata’s Strategy
One of the strengths of Teradata’s strategy is that they can serve the entire market. It was reported recently that Amazon is negotiating with Radio Shack to acquire some of its stores. In other words, the leader in on-line retailing has realized the value of the brick and mortar stores.
It will be interesting to see if the large SaaS players ever make an analogous move and create on-premise versions of their software by installing an appliance at a customer web site. So far, to my knowledge, this hasn’t happened and there are many markets in which it will never happen, but in the marketing space it could make sense.
I also see it as a strength that Teradata is engaged with all segments of the market. By doing this, I suspect they gain a deeper understanding of where the world of marketing is going. This is likely a help to their professional and creative services staff and also to product managers who create the analytics.
It also could be an advantage to allow people with a path to grow. If you start with the SMB product you could grow in the mid-market product, or move from the mid-market to the enterprise edition. But often in such transitions, companies look around at new products.
One challenge to Teradata’s strategy could come if regulators somehow overcome their objections and allow customer data to reside in the cloud. It is not clear when or if this would happen, but it would take away some of the allure of on-premise systems.
Another challenge could come if the functional foot print of the SaaS products grew to match that of the enterprise products. This could attract some large customers to the SaaS market.
I also wonder if the expense and effort of maintaining several products slows down innovation. The SaaS vendors could argue that they will do better by focusing all efforts on one segment of the market.
In the end, it seems that the hybrid deployment model will allow the Teradata Integrated Marketing Cloud the opportunity to reach more companies in different market segments than any other vendor. The question is: Will that make their business better than the strong competition they face from the other technology vendors such as Adobe, Marketo, Oracle, SAP, and IBM. It will be a fun fight to watch.
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Dan Woods is on a mission to help people find the technology they need to succeed. Users of technology should visit CITO Research, a publication where early adopters find technology that matters. Vendors should visit Evolved Media for advice about how to find the right buyers. See list of Dan's clients on this page.
