The Binary Future of Software Companies

We’re seeing a rapid separation into SaaS companies and suppliers to SaaS companies

Software as a service is the most important technology business model innovation my lifetime, and before too long all important technology will be either provided as a service, or be an expert tool purchased in order to provide a service.

Software as a Service (SaaS) will not just restructure the entire economy of technology but dramatically improve it, because the rate of learning in a SaaS company is orders of magnitude better than for on-premise software (and oh my god better than for hardware). A really good on-premise software product is released and upgraded quarterly, meaning its fastest learning cycle is a 3 month cycle. A good hosted product is released tens of times a day. Twenty releases a day, times 5 days in a week and 12 weeks in a quarter mean that a SaaS company gets 1200 releases out in the time an on-premise company gets a single release.

Every release is a learning opportunity, which means a SaaS company can learn, and thus improve its user experience, more than 1000x more quickly than even a high-performing traditional software company. With this kind of difference in the rate of improvement, before too long anyone who isn’t a SaaS company is irrelevant. Literally — you can just ignore them.

Except of course that’s not true. If you’re a SaaS company, you can’t rely only on other SaaS companies; there are problems that can’t be solved off-premise, complexities that can’t be abstracted into a service, and technologies needed to provide your service that can’t be procured as a service. The most obvious example is that it all has to hit silicon at some point, and someone somewhere does actually have to buy CPUs, hard drives, and memory, with enough duct tape and baling twine to hold it all together and enough fans to cool it all down. While this is one obvious exception, there are plenty of others.

Thus, even with the learning rate of SaaS companies, and the resulting obsolescence of most other kinds of tech providers, there is still room for those who sell to the SaaS companies. This is somewhat akin to the ’49 gold rush, when there were gold miners and those who sold to gold miners. Both were valid pursuits, and tightly entwined, but they were very different businesses.

In the early days of the software world, and especially the early days of the enterprise IT department, every company evolved to be mediocre at any kind of technology, and they all looked pretty similar. They could do just about anything, and they sold to pretty much everybody, but they couldn’t do anything particularly well. This impending world of SaaS companies hires only experts; they are absolutely fantastic at everything they care about, and they have an equally fantastic service partner to whom they can outsource anything they don’t care about.

In some ways, this world is even more dangerous to the status quo of the technology industry. Our entire industry has evolved to sell to generalists: We build pretty decent stuff, and sell it to people who are ok at managing it. Our stuff can’t be too great, because great stuff requires expert users, and we can’t demand too much of our users because they have to be competent at nearly everything within a very large field (“networking”, “hardware”, “applications”), so they can’t invest in being particularly excellent at any one thing. Also, great stuff would be really expensive, and companies don’t buy expensive stuff, because no particular investment is all that important to them.

In this new world, there exist only experts, whose entire mandate is to specialize in the specific tools and technologies that will allow a SaaS company to excel, to win. For the investments that can make a real difference, no cost is too high, and no expertise is too narrow. For investments that can’t make a real difference, of course, we just find a service partner who cares so much about it we don’t have to think about it. Thus, as a SaaS company, I only invest in technology when I can afford to invest in experts, and I immediately reject any technology built for generalists because I can’t achieve outsize results with tools built for generalists.

Here we reach a future where there exist only SaaS companies, and companies who build expert tools for narrow use cases that exist within SaaS companies. Anyone else is fiercely riding a bicycle while watching a train recede into the future. The pundits of today are correct that the cloud is the most important trend of the modern era, but they’re wrong in thinking that AWS or Cloud Foundry hold a candle to the restructuring that SaaS will wreak.