Profitability Sparks Renewed Debate About SaaS Sustainability

Posted on August 28th, by thinkstrategies in Uncategorized. Comments Off on Profitability Sparks Renewed Debate About SaaS Sustainability Profitability Sparks Renewed Debate About SaaS Sustainability

Despite the accelerating growth of Software-as-a-Service (SaaS) and growing interest in all things Cloud, skeptics are still seeing dark shadows which they think indicate fundamental flaws in the long-term prospects of on-demand services.

The most recent example was the controversy created by’s most recent quarterly financial results. While the company’s revenues grew 34% and deferred revenues increased 43% on a year-over-year basis, the company still reported a second quarter (Q2) GAAP net loss per share of $0.07.

Although I tend to look at the world through ‘Cloud-colored’ glasses, I don’t think I’m being naive because I see these numbers as a outgrowth of a prudent strategic decision by’s management to aggressively invest in winning a greater share of the high growth SaaS/Cloud market. In fact, Marc Benioff made the same point during a recent interview on Jim Cramer’s “Mad Money” show.

Like Benioff, SuccessFactors’ CEO/Founder Lars Dalgaard used to reject concerns about short-term profitability and boast that his company could manage its costs and even generate impressive margins at will if necessary before being acquired by SAP for $3.4 billion. Obviously, SuccessFactors’ operating margins didn’t concern SAP long-term. Nor have profitability fears stopped Oracle from buying RightNow, Taleo and many other SaaS/Cloud vendors.

If Saas/Cloud offerings are fundamentally unprofitable, why are these legacy vendors  and others quickly gobbling up leading SaaS/Cloud players in this market?

The legacy vendors are not only succumbing to the escalating demands of their customers for SaaS/Cloud solutions, they are also salivating over the prospects of creating more predictable revenue streams via these subscription services. The most recent example of this trend is IBM’s decision this week to acquire Kenexa.

The truth is that we are still at the ‘land-grab’ stage of the Cloud Rush and the leading players are aggressively buying share in hopes of securing long-term profitability.

The second part of this strategy is expanding the SaaS/Cloud portfolio to sell more services into existing accounts. Again, is a prime example of this tactic as it plans to broaden its services to satisfy its customers’ sales, marketing and services needs.  Marc Benioff boasted about his company’s new set of ‘Marketing Cloud’ offerings that will be unveiled at Dreamforce next month during his “Mad Money” interview.

So, the key to success in the SaaS/Cloud market continues to be ‘Land and Expand’. Just be sure you satisfy the customer along the way!

The Latest from THINK IT Services Blog

THINK IT Services Blog examines the business implications of the latest developments in the technology services market ranging from Cloud Computing and Software-as-a-Service (SaaS) to Managed Services and other forms of 'On-Demand' services.

Tercera eBook and Webinar Identify Key Characteristics of Third Wave Cloud Consulting Leaders

Earlier this month, I had the privilege of presenting the key findings of a new ebook that I produced with Chris Barbin, the CEO/Founder...

Tercera Launches to Fund Third Wave of Cloud Consultancies

I’m pleased to be one of the initial advisors of a new venture capital and advisory services firm focused on the ‘third wave’ of...

Reshaping the Software and Services Marketplace – A Guest Commentary in E-Commerce Times

In the old information technology (IT) world, systems integration and consulting companies flourished, helping enterprises of all sizes across nearly every industry pull together...