A few bullets on how the financial software industrial complex…
SOFTWARE AS A SERVICE (SaaS) vs. PEOPLE AS A SERVICE (PaaS)
– Software companies get sexy valuations because they trade at a big multiple of annual recurring revenue.
– VCs and Wall Street love the software subscription model because to grow revenue, you just have to grow sales instead of making new widgets.
– Obviously you have to make the software sticky so the revenue actually recurs.
– And if you do that extra well, you can raise subscription prices.
– This is SaaS 101.
– When your software becomes more complex, you need people to implement and upgrade it over time, which is a new kind of services revenue on top of the subscription revenue.
– But strong SaaS companies maintain high valuations by capping services revenue to keep subscriptions the bulk of revenue.
– Why? Because the services profit margins are usually more expensive than SaaS margins.
– So SaaS companies usually look to outsource services after a certain point.
– As massive software packages that control entire organizations grew in importance over the past 2-3 decades, it gave rise to massive consulting firms to handle the outsourcing.
– The big accounting firms of the last era morphed into the big consulting firms of today to capture this opportunity.
– Ironically, the services revenue that weighs down valuations of SaaS companies can become quite valuable as standalone companies.
– Look at this Accenture stock chart as an example.
– Consultants like Accenture became giants by helping software companies become giants by helping industry giants run better.
– Now the same seismic shifts that software brought to retail and entertainment in the past 10 years is finally happening in finance and real estate.
– Massive software that controls these industries is being ripped out and replaced with newer, better stuff.
– As the newer, better financial and real estate software companies are maturing, they need great consultants to manage more people and strategy stuff.
– So the software companies get their sexy valuations.
– And the newer, better consultants (like The Basis Point) get to lead people and strategy stuff at finance and real estate companies.
– Most important, you get a much better experience because the endgame for all of this is to make super cool software to help you run your finance and real estate matters more easily.
– Just like what Amazon did for retail or Netflix did for TV watching.
– Why shouldn’t managing your finance and real estate be just like watching Netflix.