Software as a Service Stocks: What Went Wrong?

Software as a Service Stocks: What Went Wrong?

StocksIronically, one of the hottest technology trends -- software as a service (SaaS) -- has been burning investors on Wall Street. As a group, SaaS stocks are down 30 percent year to date, a far worse showing than the DOW (down about 9.74 percent) and the Nasdaq composite index (down almost 18 percent), according to SeekingAlpha.com.

So, what went wrong with the SaaS market? And what are the key lessons for managed service providers?

Actually, nothing went wrong. There are a few problems, though:

  • Lofty Heights: SaaS stocks were flying high in 2007, as the hype cycle for on-demand software kicked into overdrive. It was only natural for those shares to slip at some point. And in a down market (like the one we're in), the most aggressive stocks typically fall the furthest.
  • Three Months Does Not A Market Make: Anyone who has a three-month investment horizon should not be pumping money into SaaS stocks. These are all long-term plays.
  • Faulty Indexes: If you check the SaaS stock index (see it here), you'll find some well-known names (NetSuite, Salesforce.com) but many of the index members aren't forces in the SaaS market yet.
  • Private Players and Hybrids: Look at a company like SugarCRM. They do open source. They also offer hosted versions of their software. SugarCRM's revenue is believed to be doubling annually. But SugarCRM is privately held and it's unclear how much of their revenue comes from on-demand solutions. So, "public" information about the SaaS market is a bit misleading, since so many of the hot players are privately held.

Key Lessons for MSPs

For managed service providers, the lessons are clear: As you hear hype -- and criticism -- of the SaaS market, keep your own business in mind.

Like the SaaS industry, the managed services market enjoys a ton of hype. But no doubt, we are going to hit some bumps. Some managed service platform providers will attempt IPOs. Others will get acquired. And still others will attempt high-profile partnerships.

Some of those IPOs may not go so well. Some of the acquisitions will cause market confusion. And some of the partnerships will collapse because of incompatible corporate cultures and conflicting business goals.

If and when bad news strikes in the managed services industry, keep these items in mind:
  • Measurable Results: VARs are succeeding with managed services. The top managed service providers, as outlined in our MSPmentor 100, are generating double- and triple-digit annual revenue growth.
  • Predictable Costs: The rapidly growing Master Managed Service Provider (Master MSP) business model allows VARs to test the MSP waters without writing a huge check.
  • Technology Works: Thanks to the rise of broadband and the rapid maturity of MSP software, we now have a solid technology foundation for the MSP industry. Of course, not all MSP platforms are created equally. But there are plenty of good ones from which to choose.
Still, some managed service providers won't succeed. Even in a growing, healthy market, you need the right mix of business expertise, marketing, sales training and value to succeed. We continue to bolster MSPmentor's editorial content in those areas to help guide MSPs to their full potential.

But like the broader managed services market, our efforts remain a work in progress.
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