Economic Drivers for SAAS

Michael Vizard yesterday commented on the previous day’s announcement by Cisco of its launch of their managed email, hosted and hybrid e-mail security services offering.  He suggests that the announcement is indicative of a change in buyer behavior.  He writes:

As the economy continues to be sluggish, corporate customers are rethinking their approach to acquiring IT. Until very recently, customers preferred to treat IT as a capital expense. It was easier to fund that way because most companies had ready access to credit, and the cost of acquiring the technology could be written off over a period of years.

But with access to credit all but dried up, a lot of customers are rethinking their approach to paying for IT. Instead of treating IT as a capital expense, they want to move it into the operational expense column. That means they want to pay for it as they use it, rather than buying a huge amount of infrastructure up front. This approach also allows them eliminate the need to hire expensive specialists to run the complicated offerings such as security products.

Vizard fundamentally misses the effects of the economy on the marketplace and the drivers for the change in preference for SaaS (Software as a Service) offerings for anti-spam and anti-virus protection.

First, access to credit is not a driver for the change in demand for SaaS.  According to Federal Reserve data, total bank credit shrunk for on a brief period at the tail end of 2008 and expanded again in January 2009, with higher year-over-year numbers.  In fact, there is financing available to credit-worthy borrowers.  It is the demand for credit that has shrunk as firms anticipate weaker demand and less need to expand capacity.

Second, it is Sendmail’s experience, as a classic enterprise software-turned-appliance company, that the economy is actually driving a preference for capital expenditure over operating expense.  The reason is accounting.  The current economic crisis currently affects the balance sheets more than it does the income statement.  Asset write-downs affect the balance sheet.  If a company were to modernize their messaging infrastructure with a capital expense, a current asset (cash) is traded for a data center asset that then depreciates over time.  If that messaging infrastructure were replaced with a service, you now have traded a one-time expense whose actual cost in terms of the depreciation of that asset to the business is spread out over time on the balance sheet, with a recurring liability that affects the income statement.  Shrinking sales for firms are driving a desire to get expenses off the income statement.  Spending money to save money on recurring expenses is the order of the day.

The primary driver for the deployment of SaaS for the washing of inbound email is the ancillary cost associated with the ever-increasing volume of spam.  Using a service to accept your inbound email that cleans the mail stream of the unsolicited content and email worms, you shift the burden for managing that ever-increasing volume to a third party.  It makes your data center footprint for an Internet gateway email infrastructure smaller and more predictable.  The SaaS model does not fully replace a large enterprise’s email infrastructure.  Enterprises still require an Internet gateway email infrastructure of smaller scale to handle the complex routing needs those organizations have – e.g., mail flows between business units, partners, EDI over email, outbound bulk content distribution, application generated content, etc.

What do you think?