Sequoia Capital Meeting: Our take on the economy and on-demand adoption

October 9, 2008 Appirio

Chris Barbin

There’s a lot of talk today about a meeting held earlier this week at Sequoia Capital, Appirio’s lead backer, with the CEOs of their portfolio companies. The headlines grab your attention: Sequoia has emergency meeting, Sequoia sounds the alarm, Sequoia says to cut expenses now. The meeting was held in confidence, but we thought we’d share our perspective on the condition of the economy, what it means for Appirio, and, most importantly, what it means for customers considering the adoption of on-demand.

Macro-economic conditions are critical for every business to consider. This is the time for the leader of any organization to take a sober look at their spending plans and chart a prudent path given the uncertainty in the economy. That’s our approach at Appirio, and we recommend that all of our clients do the same.
What does this mean for the adoption of on-demand? While nothing is certain, we remain optimistic that very bad news for the traditional enterprise IT industry will be very good news for cloud computing, companies like Appirio, and customers who are adopting on-demand solutions.
Let’s take a closer look at how the economic conditions are impacting one of the stalwarts of traditional enterprise software– SAP. SAP announced this week that they experienced a “very sudden and unexpected drop in business activity” last month. The announcement led to a 12% decline in SAP’s stock price. Here’s how they explained the shortfall in revenue, and why we think things are different in on-demand:
  • SAP customers faced difficulty financing upfront license fees. On-demand customers, on the other hand, pay for their solution as they use it. They don’t need to finance a big up-front investment in a monolithic solution with an uncertain business benefit.
  • SAP customers balked at difficult-to-justify maintenance fees. On-demand customers, on the other hand, know what they are paying for — they see continual enhancements to their solutions without expensive upgrades or patches.
  • SAP only learned of this in the final days of the quarter. On-demand customers, on the other hand, don’t need to engage in the edge-of-the-cliff negotiations with their technology vendors at the end of the quarter. These vendors know that they will only keep their customers for as long as they are able to create value, and need to be working every day to keep their customers happy.
It’s striking that the very things that make current economic conditions so difficult for traditional enterprise technology vendors will drive customers towards adopting on-demand. Does that mean that spending in on-demand technology is counter-cyclical? It’s too early to say. But we have compared cloud computing to the Toyota Prius — an automobile that gets more popular as economic conditions worsen and gas gets more expensive.
Let’s take an example: One of our customers built a business case comparing Microsoft to Google Apps for communication and collaboration. When they added up what they were spending on hardware, software, and people for on-premise software, storage, and backup, the total came to almost $700 per year for each of their 10,000 users. Switching to Google Apps saved this company $12M a year. Clinging to Microsoft Exchange is an expensive luxury, one that’s going to be increasingly hard for CIOs to justify.
The average company spends 4-6% of revenue on IT– for a customer at $1B in revenue, that is $40M – 60M in annual IT expense. Organizations that ‘cloud-source’ their IT infrastructure to on-demand providers can reduce this to 2-3%… a 50% reduction. This model provides cash critical in a down economy, and also provides executives flexibility and innovation that on-premise vendors cannot.
Despite these benefits, today SaaS represents only $10 billion of the $100 billion spent on enterprise software and $1 trillion spent on enterprise technology. It’s easy to imagine dramatic declines in these traditional markets while SaaS and PaaS continue their rapid pace of growth. We’ve always believed that it was just a matter of time before SaaS moved from 10% of the market to 70%…CIO concerns over TCO amidst economic uncertainty could certainly catalyze this shift.
So in the midst of all the headlines, here’s our message to you, our partners and customers:
Appirio is committed to helping our customers weather this storm. You’ll hear us talking more about the cost savings possible by moving your IT infrastructure to the cloud, and the rapid ROI possible from our custom application development. Creating real business value for our customers using on-demand technology remains our first priority.
Appirio is committed (as are our investors) to continued investment in our mission to accelerate the adoption of on-demand in the enterprise. We believe that this is a great time to develop new products, launch new service offerings, and enter new markets– stay tuned to hear more.

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