Good news for enterprise startups: SaaS helped kill the single-vendor stack

In the old days of enterprise software, when companies like IBM, Oracle and Microsoft ruled the roost, there was a tendency to shop from a single vendor. You bought the whole stack, which made life easier for IT — even if it didn’t always work out so well for end users, who were stuck using software that was designed with administrators in mind.

Once Software-as-a-Service (SaaS) came along, IT no longer had complete control over software choices. The companies that dominated the market began to stumble — although Microsoft later found its way — and a new generation of SaaS vendors developed.

As that happened, users saw a way to pick and choose software that worked best for them, as they were no longer bound to clunky enterprise software; they wanted tools at work that worked as well as the ones they used in the consumer space at home.

Through freemium models and low-cost subscriptions, individual employees and teams started selecting their own tools, and a new way of buying software began to take hold. Instead of buying software from a single shop, consumers could buy the best tool for the job. This in turn, led to wider adoption, as these small groups of users led the way to more lucrative enterprise deals.

The philosophical change has worked well for enterprise startups. The new world means a well-executed idea can beat an incumbent with a similar product. Just ask companies like Slack, Zoom and Box, which have shown what’s possible when you put users first.

Changing workforces

Eric Yuan, CEO at Zoom, a video conferencing company that went public last year, has taken on Cisco WebEx (where he began his career) and Google Hangouts. His success has proven that even in a crowded market, it’s possible to take on entrenched incumbents. Speaking at a high level about SaaS success with TechCrunch, Yuan says that over the past few years, he spent a lot of time talking to customers and sees the trend of best-of-breed winning.

One reason for that is changing worker demographics. “The millennials [and Generation Z], they always want to use the best-of-breed service, and if the CIO doesn’t pick the best solution, guess what, they are going to use their own credit card or department card to buy that. I think that has really helped drive the best-of-breed of trend,” Yuan says.

Box’s Aaron Levie agrees. “First and foremost is a changing employee landscape where they expect better technology that’s simpler, that’s easier to use, that works from anywhere,” he told TechCrunch.

He adds that that trend is pushing a critical mass of users in the SaaS world, something that just wasn’t possible in the world of on-prem enterprise software in the 1990s. “There are now a couple billion people that are using modern software, and if you think about the IT industry of 10 or 15 or 20 years ago, the total addressable market was maybe 50 million employees globally because you could only work in the largest corporations that had sophisticated IT departments,” he says. “Now, you can be in a three-person company or a 500,000 person company and use the same modern technology.”

Giving startups an opening

As more companies and users adopt enterprise SaaS products, it creates a flywheel effect where organizations of all sizes begin to feel more comfortable using SaaS software from startups than they might have in the past. That, combined with a lower cost of entry due to cloud infrastructure services, has created a huge opportunity for startups.

Levie says the cloud has created a playing field where it’s possible to solve more problems. “The cloud offers the ability to go solve such a significant number of new challenges in the enterprise that you wouldn’t have solved previously,” the CEO said.

One company that is a great example of that is Scout RFP, a procurement platform that Workday bought last year for $540 million. Scout co-founder Stan Garber says the cloud enabled his company to develop a niche enterprise product. They saw a pain point and, using cloud tools, were able to build a solution.

“We were practitioners and we came into the industry with a pain point. We talked to a lot of individuals. We found out that there was a fundamental problem [around procurement], and we put our technologist hats on and decided to find a way to solve some of these things through a very intuitive process that could bring value quickly to these end users,” Garber explained.

That ability to solve problems like this in fairly short order was made possible by the cloud. Instead of having to buy and configure servers and networking equipment, these companies could use cloud infrastructure services like AWS or Azure and leave that back-end administration to the vendor, freeing them to solve ever-more complex problems without worrying about the infrastructure resources required to scale the company.

Best-of-breed can beat existing players

There is data to back up the assertion that best-of-breed can beat existing players. Okta publishes the Businesses@work report every year, which digs into application usage on the Okta single sign-on platform. It found that this notion of best of breed SaaS tools is a real phenomenon.

To get a sense of this, Okta compared Office 365 usage on its platform with other SaaS products that do something similar to a tool on Office 365, including Box, Zoom, Slack and others. It found that there was a tendency to choose the “best-of-breed” tool over the similar tool in Office 365.

Chart: Okta

In a blog post highlighting the data in the report, Okta CEO Todd McKinnon referred to the tendency to use best-of-breed as “app FOMO.” Whatever you call it, it shows that people are willing to use the tool that suits their purposes over the industry incumbent:

More so than ever before, customers are ‘double-dipping’ by purchasing best-of-breed apps in addition to bundles. 78% of Okta’s Office 365 customers have adopted one or more best-of-breed apps with the same functionality as the Office 365 suite, up from 76% last year. When it comes to the trade-off between a centralized provider and individual solutions, functionality, ease of use, and employee needs come first.

If best-of-breed is a real phenomenon in SaaS, and the cloud has made it easier than ever to solve ever finer enterprise problems, there are always going to be openings for SaaS startups to solve those problems and build successful businesses, and that’s certainly good news for founders looking for an opening in the enterprise.