Based on conversations between Alex Mrvaljevich, Founder/CEO of Growth Kinetics & Bodhi Philpot, CTO, The Plant
Back in 1999, when Salesforce pioneered the use of SaaS in ecommerce, the world looked very different. It would be another six years before people could make the first widely available video calls; eight years before they saw the first iPhone. And SaaS was a game changer: one of the great tech innovations. For new businesses, especially, SaaS lowered the barrier for entry into the marketplace, helping a whole generation of startups to launch and grow.
Over a quarter of a century, SaaS solutions have come to dominate business software. But the world has changed during that time, too.
The two of us have worked with and around SaaS solutions for many years, and recently we got talking about how things have evolved and where they’re going next. Our conversation took us to some unexpected places, and we came to conclusions (and recommendations) that you might find surprising. So we decided to share some of them here, hoping, too, to bring you into the conversation – we’d love to hear your take.
We believe that a major industry shift is already underway. For large enterprises, the 25-year SaaS supremacy is being challenged, and we’re entering a new era, one we’re calling the Age of Bespoke.
What made SaaS so defining of its time? In the 2000s, when it rose to prominence, on-site business software was difficult and expensive to run. Most was ready-made, and came with steep fixed costs. Chief among them was the need for on-site infrastructure – infrastructure that required dedicated operations teams. One alternative was custom software, but not only did custom software make similar hardware demands, it had earned a reputation for being hard to set up, expensive to develop, and slow to adapt.
SaaS brought the promise of a new paradigm: no hardware or operational overheads, just billing based on usage. It was a powerful pitch, solving an industry-wide problem.
But the SaaS concept has an inherent flaw, one that took years to materialise, but is now in full evidence. When companies turn to SaaS to cover more and more key functions, they inevitably become more alike. By using the same templates, running the same processes, and delivering the same customer experiences, they coalesce around an identical set of strengths and weaknesses. Even when companies request special adaptations to a SaaS solution, they cannot escape this homogenisation: if a provider develops an adaptation for you, it will usually share it with your competitors.
That matters. One of the most important components for any successful business is what Warren Buffett, the legendary US investor, calls its “economic moat”, its ability to maintain a competitive advantage over time. But when a business overly relies on SaaS solutions, a well-resourced competitor can simply subscribe to those same solutions, imitate the original business, and target its customer base.
Over-reliance on SaaS actively endangers a company’s competitive advantage – it makes it easy for a rival to swoop in. It eliminates the moat, where the moat is needed most.
How can businesses defend, and even expand their market share?
Forty years ago, Harvard Business School professor Michael Porter developed the concept of the value chain, the specific things a business does that give it a competitive advantage. How well that competitive advantage can be maintained is that company’s economic moat. But the other parts of the operation, the parts less related to that competitive advantage, do not need to be defended from imitation. They need no moat.
That means two things. One – that support services and generic systems are strong candidates for SaaS solutions. And – two – that businesses looking to compete should reconsider whether systems within their value chain really need to be SaaS.
An example: a pizzeria would be well-advised to use a SaaS signature solution like Docusign for its paperwork. Its value chain revolves around providing food, not pushing paper, and it would make no sense for a pizzeria to invest in developing its own signing software. But for the Big Four accounting firms, handling contracts is indisputably part of the value chain. The organization best able to handle the signing of documents – to own and control certificates, to optimize the user experience – enjoys a clear competitive advantage over the other three.
By identifying their value chain, companies can determine which aspects of their operation need to be protected, and which can be safely outsourced to SaaS, without compromising competitiveness.
Today, companies can develop bespoke solutions specifically for the functions in their value chain. Those solutions magnify competitive advantages, because they are tailored to optimise the value-delivering aspects of what a business does. And they protect those advantages, because they are custom-built and much harder to imitate.
They are then integrated into a wider architecture that often includes SaaS-based support services. SaaS continues to play a role, but, with targeted use of custom software, the company keeps its moat, makes it wider, and magnifies the competitive advantage the moat is there to protect.
Such targeted, agile custom software simply was not possible 25 years ago. In the 2000s, when SaaS first made waves, custom software was an unsettling proposition. Projects could be expensive and slow, with uncertain outcomes, infrastructure overheads, and a tendency, sometimes, to reinvent the wheel.
Today, such preconceptions rarely apply. On-demand cloud infrastructure has transformed custom solutions, and development is tightly controlled. In the 2020s, bespoke solutions are quick to set up, economical in both the short- and long-term, and rapidly adaptable to change.
Bespoke solutions are coming into their own, as the best means of maintaining competitive advantage in a landscape saturated with SaaS. Once, the challenge was on-site infrastructure, and we entered the era of SaaS. Now, we face a challenge shaped by the success of those SaaS solutions: homogenization. And we are entering the Age of Bespoke.