When I talk to people who are new to the software-as-a-service game - sometimes other people here at BMC Software, sometimes people in other companies - the first question just about everyone asks is about cannibalization.  "Won't a SAAS offering cannibalize our traditional sales?"  I have heard this question dozens of times in the last year.

I love this question for several reasons - (a) it is so colorful and misleading! (b) it reveals a lot about the mindset of traditional software companies; and (c) in the end it does more to point out the advantages of the SAAS model than any perceived downside.  Let's break this down.

The question is misleading because it assumes moving customers to a SAAS style of delivery is a bad thing!  The word "cannibalization" gives everyone a mental picture of explorers wearing pith helmets in a giant pot of boiling water, and naturally you picture yourself as an explorer. A better way to ask the same question is, "How many customers (and which specific customers) will prefer SAAS or traditional products, and how is this potentially good or bad for us, and how should we respond?"

Which goes a long way to illustrate the mindset of traditional software companies.  If you have ever worked in an industry that has gone through a period of fundamental change, you will know what I am talking about - when a big change appears on the horizon, the typical reaction is to first ignore it; then deny it; then denigrate it; then worry about it; then respond to it. I think the "cannibalization" idea is somewhere between denigration and worrying on this spectrum of responses.  This makes me think of Detroit automakers who ignored Japanese cars in the 1970's, or telecom companies who sat on packet-switching technology (which they actually invented) rather than upset their circuit-switching empire. Good examples of what NOT to do.

I believe SAAS solves many more problems than it causes for vendors.  Sales can be easier, faster and cheaper when a customer can evaluate your offering online, without any assistance or approval, and make a fast decision based on what they see.  Dev, test and support costs can be much lower when you no longer have to support many different OSs, DBMSs, app servers (and versions of all these, and dozens of combinations of all these).  You can release new capabilities and bug fixes as often as you need without inconveniencing your customers with a huge redeployment.  And on and on and on ...

The SAAS model can be so much better than the traditional model that you actually want to cannibalize your traditional products.  Don't you want to reduce your cost of sales and cost of support? Assuming your software and services are good enough, the lifetime total value of a SAAS customer can be much higher than a traditional model because the cost of sales and support is lower, and the service renewal rate can be very high.  If your customers like you, they will renew service every month or every year and keep on going.

Of course if your software / service is not good, customers will drop you like a hot rock.  That is the core issue of concern, the unspoken fear behind the "cannibalization" question - we understood the old market and did well there. We will have to work hard to respond to the new market and may not win there. Are our products up to the challenge? Can we afford to maintain the traditional product while creating a new one? Can we cross the chasm?  The economics of transition are tough, but if you don't do it, someone else will - another company whose ideas are just as good as yours, doesn't have the benefits of your install base (recurring revenue, customer relationships) but also doesn't have the pains (legacy code, support costs, etc.).

It is up to you to which role your company will play in the SAAS world - the explorer, the cannibal, maybe even the firewood or the giant pot. Eat the other guy before he eats you. "Cannibalization" is only bad if you are the one in the pot.

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