How much damage will software as a service do?

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We all know the economic downturn is driving IT organisations towards software as a service.

We all know SaaS is causing grief to the established enterprise vendors, who are trying to scramble into that space.

And, because of the problems the industry giants are having with SaaS, we are getting some insight into the margins that vendors make on software.

Enterprise vendors want 30% margins, SaaS vendors are making do with 6%. Most CIOs and IT managers are working for organisations that would bite your hand off for 6% margin in 2009. Lots of people will be doing the maths.

The esteemed Anthony Miller from UK Hotviews, teased this out from yesterday’s SAP results.

SAP CEO Leo Apotheker’s comments about the snail-like pace of the roll-out of its mid-market SaaS offering, Business ByDesign (BBD), speaks volumes about the structural financial challenges facing legacy software vendors as they ‘ascend into the Cloud’.

Here’s the problem. SAP’s operating margins are now around 25%; they are aiming for over 30%. BBD is losing money, even ignoring the gazillion euros SAP has so far spent on R&D. Apotheker noted that typical SaaS vendor margins are around 10%. Actually, the most notable, and arguably the most successful player, Salesforce.com, is more like 6%.

He says he wants to control BBD roll out so as not to dilute group margins. How? This is not a trick question – I just can’t see how! The more successful BBD becomes (and we should all live that long), the worse it gets for SAP.

As Anthony says, all legacy software vendors are going to face this problem. The impact of this on end users will present both opportunities and cause considerable grief. It is going to be an interesting year.

Catching up with Richard Steel’s CIO blog today, I couldn’t help be struck by his comments on security discussions taking place among government CIOs.

In the “Invisible Infostructure” technology cluster, it was noticeable that nearly all technologies listed under “Jericho (de-perimeterised) security” were identified as “must-haves”, but I was not particularly surprised to hear that what’s actually happening is pressure to “build the walls higher, and fill the moat with more crocodiles”.

That, of course, is one of the major contradictions we have to reconcile if we are to make effective progress.

This is not just a public sector issue, the same arguments and contradictions will be found in all sectors of the economy.

As each week brings more data loss scandals, it is a timely reminder of the prescience of the Jericho Forum when they began to insist on securing the data, rather than the perimeter of the networks. It is also a reminder that they have barely scratched the surface of the problem.

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