SaaS always was a Services Business

The Rise of Services as Software

There is much talk of the death of SaaS as AI will revolutionize software in the form of “Services as Software”. Unlike traditional SaaS, which primarily focuses on delivering out-of-the-box software applications over the internet, Services as Software aims to build custom solutions to automate tasks, workflows and eventually job functions. This has the potential to automate workflows for marketing, legal, back-office workflows, etc. AI will streamline and automate many of the functions that were once manual and labor-intensive that traditional SaaS and RPA products couldn’t touch. While this seems like an entirely different approach than SaaS, I would argue this is the SaaS playbook in reverse.

The Fallacy of SaaS

There is a common misconception about what SaaS truly represents. Take Salesforce as a prime example (I worked there for 8 years). Often hailed as the epitome of SaaS success, Salesforce is essentially a set of primitive workflows built on top of a database. To make Salesforce work, companies need to hire consultants to customize and configure the software to their specific needs. This is true even for small implementations, and is even more critical for large implementations.

What many don't realize is that the service industry surrounding Salesforce is immense. For every dollar spent on Salesforce software, an additional one to six dollars (sometimes even more) is spent on services. This hidden economy of services is a critical component of the SaaS ecosystem. Salesforce's success can be attributed to what I would say is effective product marketing. Salesforce targeted a specific use case, salesforce automation, with their product. For each implementation, there was a lot of customization. For smaller implementations most of the workflows were pretty standard with a few custom fields and custom workflows. For larger implementations, there was a lot more customization.

This initial offering served as the initial land, allowing them to introduce the more comprehensive and customizable Force.com platform, which ultimately made their solution indispensable. On Force.com, customers would build all sorts of custom workflows. Once a customer started to build custom workflows, they were stuck. You couldn’t rip out Salesforce at that point. This is where Services as Software is headed.

The Future of AI-Based Software Companies

AI-based Services as Software companies will likely follow a similar trajectory. To gain a foothold in the market, these companies need to lead with a specific value proposition or use case. “We solve x, y and z for lawyers”. These are not out-of-the-box products, but custom solutions. By demonstrating a clear and immediate ROI, this will open doors to broader applications and more extensive automation capabilities enabled by AI.

Just as Salesforce used its sales automation tools as a product marketing strategy, AI companies will need to showcase specific solutions with high ROI to highlight the power and versatility of their AI technologies. This approach not only builds trust with potential customers but also sets the stage to adopt additional AI-powered solutions to automate their operations.

What’s Different this Time; AI Enables Better Services Margins

Building fully custom solutions out of the gate is now viable because AI can automate a lot fo the mundane services tasks. Whereas, a customer might spend $100K for Salesforce and then spend $250K on services. Those services have a 30% GM, and it will take 6 months and multiple efforts to get Salesforce to work; not to mention the ongoing services. To build a custom solution out of the gate would have cost multiples of that.

This is why Salesforce focused on a core workflow around salesforce automation and pushed services off to consulting firms like Deloitte, PWC and IBM. Those businesses collectively generated more revenue in services than Salesforce. However, these were low margin businesses, so Salesforce didn’t want that revenue on their books.

I am now seeing companies build fully custom solutions for complex workflows in days to weeks with minimal labor. For that same $100K solution, there might only be $10K of services. While that $10K still might have low margins, it’s only $10K. That initial $100k land, will also create the opportunity to build the next 9 solutions and achieve more than $1M in annual revenue. With each successive solution, the services will get increasingly efficient. As commons sets of repeat solutions are identified, the solutions will look more like SaaS products with minimal customization.

The reverse is also true. Salesforce and Salesforce SI’s will increasingly rely on AI to automate their implementation services. Ultimately, the services revenues surrounding SaaS products will decrease. This is something every consulting partner and BPO realizes. They are all scrambling to develop their own AI solutions to address this coming wave of AI automation.