Long read: Introducing the Managed-Service-as-Software (M-SaS) Startup

Last week we went to Silicon Valley to meet VCs and family offices which specialize in tech centric investments. Whilst we were learning about the latest developments in technology from these investor, this year’s Nobel Prizes for both Physics and Chemistry went to AI-centric thinkers. Not surprisingly therefore we learnt in the Valley about new operational models which are likely to transform how IT Services company, tech product vendors and their companies interact with each other. This thought-provoking blog from Dan Nguyen-Huu at Decibel, an VC, will give you a flavour of how the world is likely to change. If you work in IT Services or in the tech sector, we would suggest that you read the blog in full. Here is our synopsis of what Dan is saying.

Long ago i.e. in the 1990s we saw what is now called “On-Premise” model where “As software was installed on-premise at the customer site, software was sold in the form of ELAs (Enterprise License Agreements) with an attached support contract. The ELA was essentially a large dollar amount that allowed customers to use the software into perpetuity while the maintenance/support contract was annually recurring in nature. Traditionally, the breakdown between the perpetual license and support was a 90% / 10% split. For example, a VMware vSphere license, illustratively, would be $900K with a $100K support contract, for a total contract size (TCV) of $1M. The customer could use that version of the VMware license forever, but of course, every 2-3 years there would be a refresh cycle which would allow VMware to charge for their latest version. Since a service would be associated with maintenance, only 10% of the ELA would be annually recurring.”

Then at the turn of the century we entered what is now called the “Cloud/SaaS” model: “In the era of cloud, we were able to deliver software directly to the customer without coming on site for installation. Since everything ran and still runs through the cloud, the way we charge for software also changed to a fully recurring model. No longer did we split up the perpetual license against an ongoing support license. Support and license became one, charged annually, and thus SaaS was born. Many new SaaS companies emerged as incumbents struggled to keep up, often due to the challenges of replatforming to the cloud and their entrenched ways of selling software.”

Now, says Dan, we are entering a new era in which thanks to AI the conventional Cloud/SaaS likely to be disrupted: “With every new technology development comes a new business model disruption. With AI at our fingertips, a new path has been forged for startups to consider when building the next generation of companies, which I call Managed Services as Software.”

Here is our simplified version of what Dan is saying (as mentioned above, the pros should read Dan’s excellent blog in full). Let’s take the example of a basic back-office service like the call-centre. A call centre provider will no longer pitch to, say, Wells Fargo that “We will shift your call centre to India and cut your cost by 50%”. Instead the new pitch will be “we have AI powered software where for every 1 call centre agent, you will be able to get the work done that is equivalent to 50 human beings sitting in a call centre (regardless of whether the human being is sitting in Gurgaon or Detroit).” The same applies of loan underwriting or sellside brokerage or software testing. Basically, 1 smart human being with an AI co-pilot can do the work of 50 human beings.

This operational model has several implications:

We would love to hear from our readers about their thoughts on this evolving subject.