Enterprise Software is Not Dead Yet

My posts of late have reminded me of the scene in Monty Python's "Holy Grail" when, despite being left as rubbish on the side of the road, the old man insists "I'm not dead yet." That's my mantra -- not dead yet. It may be a stretch to say "I feel like dancing." But we are definitely not dead yet.

In the tech world, the sector that has perhaps been most left for dead is enterprise software. For some time now the pundits have been declaring enterprise software moribund -- they argue that everything worth building has been built. And what little room there may be for innovation, will best be served by the existing behemoths, SAP and Oracle. Bring on the recession and, the conventional wisdom goes, those of us who have invested in enterprise software might as well close down the companies and recover what little cash we can.

I'm here to tell you that the pundits are wrong. Enterprise software is alive and well. But like all other things in this recession, only the truly strong will survive. And strong is pretty easily defined in this economy -- the strongest enterprise software companies deliver their customers the biggest Return on Investment.

For most companies today, ROI will be measured in total cost savings. Can I cut fat out of my technology budget? In many instances, the heros of the cost savings battle will be SaaS companies. By now it has been well documented that Software as a Service delivers significant savings in Total Cost of Ownership, let alone cheaper annual licenses. The overall savings are so great that enterprises are increasingly looking to SaaS companies to replace enterprise solutions that they were previously hosting behind the fire wall. And, while it is no insignificant task to grow an enterprise SaaS customer base, once that customer base has reached critical mass, it is the gift that keeps on giving -- each month's revenue starts with the previous month's revenue and grows from there. [1] Look no further than Salesforce, Workday, and the likes -- Strong SaaS solutions are going to continue to prosper in this economy.

SaaS companies aren't the only enterprise software solutions out there delivering great cost savings. There are a number of next-gen enterprise applications that do more for less. The sales pitch is easy -- for fewer dollars than you are paying for maintenance on your existing enterprise stack, you can purchase a modern application designed to address your problems using up to date technology. Take my portfolio company Splunk, for example. Rather than continue to pay the likes of SAP, Oracle, HP huge amounts of money for enterprise management, debugging, compliance and search tools, Splunk will deliver greater functionality and flexibility for a fraction of the cost. So it is not surprising that, despite the economic challenges enterprises are facing, Splunk's user-base and revenues are growing significantly quarter over quarter. The same story applies to the open source stack as well (mySQL, XenSource, etc. etc.). Companies will pay to save money. Even in a recession, those enterprise solutions that can credibly argue that they will save you more than they cost will continue to grow.

There is one other class of enterprise software that will fare well through the recession. That software is also sold with an ROI story. But the ROI isn't delivered with cost savings. The ROI is delivered with increased productivity. It's a hard story to sell in a down economy, but the best companies will manage to do it nonetheless. There is no question that those companies that continue to invest in technology through the down cycles will disproportionately benefit when the pendulum swings back the other way. Perhaps the easiest version of the productivity story is Price Optimization. If you can credibly argue that a customer's increased profits will exceed the price it will pay for the software, purchasing the software should be a no brainer. Supply Chain and CRM software were sold on a similar efficiency story in the late 90's and early 2000's and, in many instances, continue to drive significant ROI for those customers who adopted them early.

I don't want to sound too Pollyanna-ish as I continue to bang the drum for technology in this economic downturn. But the best companies will assuredly survive and thrive. And that goes for enterprise software as much as anything. I have no doubt that there are still huge enterprise software companies to be built and I am as anxious as ever to fund them.

[1] It is possible for a SaaS company's revenue to go down month over month, but that would require that its attrition rate be greater than its acquisition rate. For the best SaaS solutions, that is quite unlikely (given TCO, ease of use, etc.) -- they have proven wonderfully sticky. The biggest challenge for SaaS solutions is unquestionably user growth. Once acquired, SaaS customers tend to be in for the long haul.