Aaron Shapiro

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The New Software Split

September 10, 2020

There is a dichotomy that has historically existed in the software-as-service sector. One one hand, SaaS companies can help the little guy do things only big guys could normally do. On the other, SaaS solutions can help the big guys be as nimble and fast as the little guy. The result is two very different business models that eventually converge and cannibalize each other for a given segment of software.

I saw this dynamic first-hand with the first company I started, Silverpop. We were in the business of providing marketing automation software (think emails sent by big companies, like newsletters or bills), and we had to choose a business model:

  • Software Package: Do we focus on selling licenses, where our packaged software is sold to the enterprise, so they can run our software installed on their servers?
  • Professional Service: Do we use our software as a pure service solution, where companies come to us to send an email marketing campaign and we do it for them?
  • Enterprise Software-as-Service: Do we make our product available as a software-as-service model and sell large corporate subscriptions, where we have an enterprise salesforce and respond to RFPs?
  • Small Business Software-as-Service: Do we sell to smaller businesses where you just put in your credit card and start selling direct online?

Packaged software may seem ludicrous today, but back in the early days of Salesforce, not choosing the packaged software route was pretty revolutionary. But even today, you’d be surprised how many successful companies still sell packaged software. Those firms know they need to change; the question is in which they’ll move.

For Silverpop, creating packaged software was too heavy a lift, and our short-term revenue was all in professional services, but we felt professional services did not scale. So, the choice for us was the Enterprise or Small Business route. For better or worse, we choose the enterprise route. The decision worked out, but that’s an increasingly difficult proposition today.

Today, the norm for the typical Saas startup is the small business route. They start with a very basic feature set, so basic they can build it with the budget of a small startup, but they make sure it has just enough features to be attractive to a small business, who tend to have pretty basic requirements. If they’re lucky, in addition to startups, a few departments in larger companies ignore their IT department and start using it as well. Over time more and more features are built, the software gets increasingly sophisticated, and they start to move up the value chain. Eventually the product is mature enough for IT departments to embrace the solution, and more and more larger companies, attracted to a streamlined purchasing process and likely friendlier interface, adopt the product, even if they’re not quite as feature-rich as the more enterprise alternative.

Before you know it, you have a product like MailChimp, once something that would have been looked down upon by Silverpop and its ilk, become fearsome competitors and massively successful products, widely used by companies small and large. Shopify, Slack, Zoom and Altassian, are all examples of companies that had humble, self-serve origins and quickly grew to dominate their respective markets with increasingly sophisticated features.

Then we have the reverse side of the equation. Usually the province of legacy companies, these companies embrace simplicity to move from packaged to enterprise SaaS, and/or from enterprise SaaS to self-service. Their challenges are the reverse: they recognize the future is software-as-service; they recognize companies increasingly expect to try before buying and are skeptical of large technical integration projects. So they work to bring simplicity to the complex. They strive to make it easier to use and easier to try and buy; something with less and less technology implementation required. Kudos to Microsoft for fighting back with Teams and Azure, and we can see this to varying degrees of success at Adobe, ServiceNow, Splunk and other software companies formed in an earlier era.

The result is a battle that plays out in almost every software category: the complex legacy products get simpler; the upstart self-serve products get more sophisticated; whoever reaches the complex-enough/simple-enough nirvana fast enough is the one that dominates. Once that happy state is reached, customers love it. The product does not require a lengthy RFP and risky implementation; and there’s no need to try a scrappy upstart that isn’t quite robust enough. A self-serve, robust solution is the solution that wins.

But the future is not all self-serve, because of one reason: the expertise gap, and that’s where the new software battle lines are being drawn.

For many companies, software is not enough. They need help using it. As a result, we’ve seen an emergence of a new, old path: professional services. For the truly complex, where real expertise is required, the answer is to bundle software and services--the old model we rejected out-of-hand at Silverpop, but today is increasingly viable. In this context, the decision for the buyer is: do I buy a tool that does XYZ, and use that tool to solve my problem, or do I hire a firm to just solve the solution itself? For this reason we see the success of firms like Palentir (which, while technically software, has a heavy service component), but also the continued success of professional services firms like Accenture, which increasingly bundle their own software with consulting. The sale is consultative; they’re responding to RFPs; and the software is the secret sauce that makes their brains better than another set of brains a company can hire to solve a problem.

The future of software is therefore evolving. Once the divide was packaged software or SaaS; SaaS won. Then the divide was enterprise SaaS or small business SaaS; small business SaaS usually won. Now the divide is self-serve SaaS versus a full-service consultative solution, with everything else in between getting cannibalized.