Are We Seeing the Beginning of SaaS Consolidation?
The number of vendors selling to sales and marketing has exploded from 500 to more than 3000 over the last three years. Are we reaching the end of an expansionary cycle? The software pendulum tends to swing between software suites, offering a collection of different tools, and best-of-breed point solutions.
But, have we reached the point where the best-of-breed, fragmented ecosystem is a permanent fixture? Okta’s Businesses at Work 2016 report calculates most enterprises pay for somewhere between 10-15 corporate applications. Those are the ones sanctioned by IT. How about the others?
Netskope’s Cloud Report calculates the average enterprise uses 613 cloud apps, a figure that doubled over the course of 2015. In addition, more than 20 percent of those surveyed use more than 1000. CEB found more than 30% of IT spend is bottoms up.
Can this continue? Consumerization of IT is a powerful secular trend that has shifted the purchasing decision from CIOs to line of business owners, because new solutions, these point solutions offer important differentiation to the line of business owners.
As long as this differentiation is substantial, we will continue to see fragmentation. A marketer who uses a best in class marketing automation solution to attain their lead and meeting numbers is not going to give up that piece of software without a fight.
But, this expanding constellation of point solutions does present some problems. First, billing. How does an organization understand exactly how much of the spending on software and so much of the purchasing decision is fragmented? Second, integrations across a thousand different pieces of software will be an enormous challenge. APIs certainly solve some of these data movement challenges, but they will not eliminate all friction. Third, how you train a team on so many different pieces of software? How do you ramp up new employees? Fourth, when something goes wrong who do you call? You have a thousand phone numbers to choose from.
The advantages of point solutions have to outweigh those costs. Over the last 10 years, the first decade of SaaS, startups have brought distribution, design, technology advantages and even have created new categories. Those startups who have sustainable competitive advantage will continue to thrive.
But, we are starting to see some categories with large numbers of entrant, where suddenly price is the diffentiator, because the category has been established and there very few barriers to entry. The recent boom in venture capital investment certainly intensifies competition with lots of new businesses chasing the same dollar.
These are the spaces where we will see suites develop, where commodification is inexorable. If you are competing on price, at some point you will bottom, the price you cannot undercut. At that point, the business will begin to compete on service rather than product, customer acquisition, technology, category creation etc. And whoever has the bigger balance sheet balance sheet will win.
Businesses can unlock a lot of value in bundling the collection of commodity products. They sell an integrated suite to a customer offering them a single purchasing process, a single customer support experience, and a “seamless” product. Without sufficient product differentiation in the market, this is a powerful way to change the buyer’s key purchasing criteria.
This year, we’ve seen more than 30 $1B software acquisitions. We will see more, and bigger companies will begin to bundle software into their offerings creating suites in SaaS. In categories with little technology or other differentiation, that may very well be the winning strategy. Meanwhile, successful startups will continue to do what they always have: develop sustainable competitive advantages through technology, speed of execution, and distribution innovations.