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Attention Enterprise Cloud and SaaS Vendors: CAPEX is no longer the problem, OPEX is the problem. August 25, 2012

Posted by Bernard Lunn in Enterprise Sales, Enterprise Web 2.0, SAAS.
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One of the big value propositions for SAAS has been:

– No CAPEX

Pay as you use licensing converts IT from CAPEX to OPEX. That has worked brilliantly, perhaps too brilliantly. While nobody was looking, the CFO’s attention shifted away from CAPEX. This is hard for cash-strapped start-ups to understand, but big companies have ridiculous amounts of cash on their “fortress balance sheets”. They have so much cash that they don’t know what to do with it. They can give it back to shareholders via Dividends and Share Buybacks; that gives a short term boost to the stock price, but it is not what they are paid to do.

They want propositions from vendors to spend that cash to:

  1. improve the profit margin by reducing OPEX. That is a much better way to boost shareholder value than buying back their shares.
  2. generate new revenues. This is why acquisitions are so popular, but shareholders prize organic growth more than acquisition led growth. If you have a credible way to grow revenue organically, you will seriously get the attention of the CXO folks in their corner offices.

Now look at the standard SAAS/Cloud pitch from this corner office:

“you won’t need to spend that plentiful cash but by letting us grow unchecked within our organization we are in danger of letting our OPEX get out of control”.

Your frictionless customer acquisition has become their out of control OPEX spending. The “no CAPEX” pitch was ideal market entry pitch for SaaS and Cloud vendors, but it is no longer the compelling proposition that it used to be.

No CAPEX still works well for two types of customer:

  1. Startups and smaller companies. They are always cash-starved. But as a vendor you have to bet that one or more of these startups will become big. It is incredibly hard to scale a business if all the customers are startups or small.
  2. Operating units within an enterprise. They tend to have minimal external IT budget as they are supposed to get big IT projects approved through the internal IT department via the CIO. That internal process can be expensive, lengthy and political.

Both of these can be excellent market segments for vendors, but this should not be mistaken for an enterprise value proposition.

The great enterprise software startups of the past almost all bootstrapped without Venture Capital funding. They could do this because selling perpetual licenses is wonderful for generating cash. Sure, selling perpetual licenses will lead to problems in the long run – huge pressure to close big deals at the end of every quarter and lack of revenue visibility. For most entrepreneurs this is a bridge that they can cross at a later date. In the early years the three golden rules are 1. Cash Flow, 2. Cash Flow and 3. Cash Flow. The other part of the perpetual license model is the Annual Maintenance Fee. As this is cumulative, it creates revenue visibility as the venture matures. Look at the financials of a mature enterprise software company and you will see a big % of the revenues coming from Annual Maintenance Fees which have similar characteristics to SaaS subscription fees – good revenue visibility and low churn.

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