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IT in the Cloud: SaaS vs. On-Premise Architecture Strategies

By John Cowan, Co-Founder and CEO

When considering the tectonic shift we are seeing toward IT in the cloud, it’s important to remember a few points:

  • Fact 1:  Salesforce.com created a disruptive technology movement by delivering enterprise software-as-a-service (SaaS), changing forever the dynamics of new entrants competing against entrenched incumbents. Recall Salesforce.com’s premise was NOT about better salesforce automation software. Instead, their approach was all about “No Software”.

 

  • Fact 2:  SaaS oriented companies generate more than a 75% higher exit valuation on average than traditional on-premise software solutions. Valuations are indicative of where an industry is going, not where it has been.

It was 2006 when Delano Seymour and I began crafting the prototype behind UC6, 6fusion’s centralized and universally metered platform to access the cloud for infrastructure-as-a-service (IaaS) buyers to fully leverage suppliers IT infrastructure resources in the cloud.  Around the same time an entire raft of other software companies were springing up to say “hey, buy my software and you too can have a cloud!”

We couldn’t for the life of us figure out why anyone in their right mind would architect cloud enablement software in the classic enterprise stack framework — known as ‘on-premise software’.

Fast forward five years and I am thankful for the important decisions we made to carefully architect the IaaS version of Salesforce.com.

Selling greenfield technology is a hard thing to do.  There simply are not many enterprise IT buyers without the risk aversion associated with doing big project with little-to-no historical baseline for success.  And cloud has been as greenfield as it gets. As a buyer of on-premise cloud software, why would I want to take the risk of buying, racking and stacking more hardware and provisioning and maintaining more software, when everyone from my CIO to every IT analyst in the world is telling me that IT in the cloud is the future of IT service? Buying cloud enablement as a SaaS is a risk mitigation strategy for even the most conservative of enterprise IT buyers.

FUD sellers in the on-premise world often point to the IT security concerns arising from the idea of multi-tenant software.  Customers need to do their due diligence and not sacrifice things like security on the altar of general IT cost savings.  However, I think the generation of enterprise SaaS companies that followed in the wake of the Salesforce.com movement have proven beyond a shadow of a doubt that any potential IT security concerns are but a fleeting obstacle to selling.

The rash of acquisitions in the cloud enablement software field is very telling.

All great examples of how building on-premise software in the cloud era failed to generate large enterprise value.  All three companies were acquired for less than $150M.  DynamicOps, for instance, sold out to VMware for what most believe to be something in range of $125M to $150M.  DynamicOps raised $16.3M from investors over the course of its four plus years in existence.  Even at the top end of that exit price it represents less than a 10x return to investors.

The valuations and prices paid for SaaS companies focused on IT in the cloud are considerably higher than its on-premise counterparts, as evidenced by Salesforce.com, Box, and many more. Acquirers highly value subscription revenue models.  Moreover, the cost to support and scale SaaS delivery is exponentially more efficient than building software the way our parents did.

So, if you are thinking about building the next great cloud app, take the time to figure out how your business model will work in a SaaS architecture.  Your investors will thank you later.

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