Give people a chat box that can do unlimited power and they're like, 'Tell me a dad joke.' In the technology world, the underutilized capabilities are so big. It's almost trite now to say the models are far ahead of the value they're delivering.
The whole history of software from 1960 until 2022 was you would take a filing cabinet and you turn it into a database. The cool thing about everything that's happening in AI land is that the filing cabinet can do work.
The idea I would vibe code my own workday and then run it is terrifying. However, there is a great gain we are seeing internally in extensibility of software using things like vibe coding.
Everyone has been talking about the SaaS apocalypse. Some people call it the catastrophe. Why is there too much fear about this?
As I've said, not every SaaS company is going to thrive through the next decade. We're not here to defend all of software.
The whole history of software from 1960 until 2022 was you would take a filing cabinet and you turn it into a database. So the first example of this is a company called Sabre Systems which was started in 1960 by IBM and American Airlines because it took the reservation system which literally was stored in like vaults of filing cabinets manned or womaned by lots of secretaries in like the 1950s and 1940s. Airlines have been around for a long time and then it put them in an early SQL database or an early database back when you know a 10 megabyte hard drive probably cost like a hundred million. And then that's what happened with electronic health records and the first one was called MUMPS, it was built by Mass General Hospital. There were the first SIE systems predating Salesforce or actually the first CRM was called ACT! Systems in 1987. So basically every single filing cabinet became a database and there were benefits to that but it didn't actually make the world that much more efficient. Because whereas before you would have a human go fetch you the HR file for Eric, like 'Oh go to the HR filing cabinet get me that file,' now it's in Workday. But now you have to have a CISO to make sure that your Workday doesn't get hacked, you need to have IT people to provision accounts in your SSO to Workday. So did the world get that much more efficient? It did if you have multiple offices, now people can collaborate, you could do complex joins on a database, much much harder to do that on pieces of paper. But that was kind of software from 1960 to 2022 because the filing cabinet couldn't think for itself. And now this is like the cool thing about everything that's happening in AI land is that you know the filing cabinet can do work. Like QuickBooks can actually accomplish a task by itself versus just relying on a human to retrieve the file from QuickBooks in the same way that the human in 1500 would retrieve a file from ye old filing cabinet from ye old accounting department. So it's interesting.
It's actually a great segue into of course what is everyone talking about right now or has been talking about, the SaaS apocalypse. Some people call it the catastrophe of obviously what's happening in the public markets. And a lot of people have different perspectives of how significant it is or what it means. I want to hear from both of you how you interpret what's been going on and more importantly what it means or how we should make sense of it. Why is there too much fear about this or how should we make sense of this?
Look, I think the world is trying to work out how to rate or value software businesses in a highly disruptive stage, right? And everyone has hot takes about what the future's going to look like, right? And depending on the takes, you get a version of the future that's either really good or really bad for all of software, certain companies, certain categories in software. It's a really interesting thing. There's no doubt in my mind that the risk level has gone up. So if you think about it from an investor mindset, you're like this used to be a very stable category. Now it's a more risky category, hence I'm going to step away and watch. And as I always say, investors are trying to work out not necessarily the DCF cash flow model of a company for all profits of history. They're really trying to work out what are other investors going to do, right? And they're actually betting on what other people think that other people think they're going to do. And right now that sort of logically makes sense. You have an interesting world where everyone has a version of what the future is likely to look like and it seems likely to them. It's pretty disconnected from the reality on the ground. But the answer is always what if AI can do that in two years or three years? What does that mean? And I think it comes from a very static viewpoint, right? Like that people won't adapt. The world won't change. It's like one thing is going to change and everything else is going to remain static. So you have this interesting world at the moment where businesses like ours are doing very well, right? We've had three great quarters in a row and everybody says so and then you're like wait but that's used to equate to some value and it's our job to prove that that's not the case for our business, right? We're not here to defend all of software obviously but for our business we feel very good about the opportunities we have, the data we keep showing, the results we keep showing. And that doesn't mean, I always say this as well, it doesn't mean that we don't have to adapt. It's this weird world that like we are changing how we work radically and quickly as we always have as we've been doing for a number of years. Some part of that I think assumes that we won't be able to change, right? There are strategic vectors for sure. But look, the reality is, as I've said, not every SaaS company is going to thrive through the next decade, right? Just like a bunch didn't make it to the cloud, a bunch didn't make it from Windows to the internet era or whatever, whichever era you want to say, no one is going to say, I think, that 100 out of 100 SaaS companies are going to make it through and be thriving and growing on the other side. Also, we have this version that software kind of dies. A lot of it just ends up as a cash revenue stream. I can speak for us. This is the best thing that's happened to our business, right? We're in a knowledge world. We have tools to play with that knowledge, to act on that knowledge, to do all sorts of other things to solve the jobs our customers have always hired us for. This logically is very good, but it's up to us to execute through that transition, right? Which I think we're doing really well, but again, we have to prove that to people over time. The patience part is hard for markets.
Alex, how about you? How do you react to what's been happening or how do you make sense of what's going on?
Well, I hope I'm right in the long run, which is all this stuff is crazy. I think I tweeted about this a few weeks ago where my cursory glance is that there were three different types of SaaS companies and the public markets couldn't tell the difference between the three. And one is where seats are tied to outcomes. So seats are being used by people who use, kind of going back to the filing cabinet metaphor, right? Like if I'm Zendesk, I'm using Zendesk and they came up with a very clever pricing model. Which by the way, like maybe I can take a step back before I even answer your question, which is there's this great book by Dan Ariely called Predictably Irrational. And I used to give it to all my product managers at my company. It's like study this to figure out how we charge people for stuff. Because it turns out like people like, and the example that he gives is like imagine you're locked out of your apartment. It's midnight. You hire a locksmith, comes one minute later, lets you in in 30 seconds, says it's 500 bucks. You're like 500 bucks? What the f? Like you just did like 90 seconds of work. You leave him a one-star Yelp review, no tip, protest the charge on your credit card. Now imagine parallel universe, locksmith comes, spends nine hours trying to let you in. Goes back to his office to get more tools, finally by like 9:30 in the morning, finally lets you into your apartment. You're so grateful that he spent nine and a half hours helping you get into your apartment that you give him a $200 tip, leave him a five-star rating on Yelp. This is an example that he gives in the book. And it basically means humans are kind of capable and willing to pay for incompetence. Like a lot of pricing is about fairness. It feels fair that I give that guy more money even though he's completely incompetent than his counterpart who's super competent where I'm so pissed that he overcharged me and it doesn't make any sense but it feels fair. And if you think about how we got to SaaS like per seat per month, like when you're giving away in many cases the additional cost of provisioning a seat digitally is close to zero, not for everything but for some things, it just feels fair. It's like oh you have 500 seats you pay more money than if you have one seat even though it's kind of the same thing going on in the background. So the three types of SaaS companies that I think of, great oversimplification here, but category one is like you have seats, the seats are being used to produce some element of work, but now uh-oh, like you don't need the seats anymore to produce the element of work. So like Zendesk would be patient one there where it's like how many seats does a Zendesk customer need today if they're using Sierra, Decagon or roll their own? It's like potentially zero. So Zendesk, we talk about the present value of future cash flows. It's like they're in peril because the per seat pricing, like if Zendesk said we're just going to charge you per seat per month for the current thing, never make a change to our code or our pricing, that revenue stream is 100% going to zero. On the other hand, it could triple or quadruple because they might just move to outcome based pricing and ditch. I mean, it still has to be subject to the laws of fairness and predictable irrationality that we talked about. But something like Zendesk it could go up it could go down but the default path unless it changes is going to zero. On the complete other side of that is you might have per seat pricing because it feels fair but the seats are not tied to an outcome. So like Workday has this great pricing model where like oh you're GE you have 340,000 employees. Yeah I'm going to charge you per employee per month. Why? I don't know. It just feels fair. But those employees that work at GE are not using Workday to produce an outcome. So Workday I think is fine. In fact, if anything, and this kind of goes into what can you do with AI tools, well, when you hire somebody at GE, they need to do a reference check and make sure that you worked at the three companies that you claimed you worked at. An HR person has to go look at the file that's in Workday and go call those three companies. Workday can call those three companies. Like an AI tool can do that, but only if you're the system of record. So something like Workday or Intuit, it's down 45% in the first, it's February 26th or 27th today, down 45%. Nobody's going to get rid of QuickBooks. So these are the two tent poles is like per seat charged per month or per whatever and it's tied to some kind of work and then seats just happen to be a clever pricing trick, but it's not tied to work. And then there are things that are in the middle like Adobe like yeah maybe you need more seats maybe you need fewer seats but it's not as stark as the Zendesk example nor the Workday example. And then against that you have this kind of undercurrent of oh I'm going to vibe code everything which I think is just preposterous having been a software developer for a very very long time because the person that I like to cite as my counter example here is my second favorite economist David Ricardo and in 1817, he lived a long time ago. But this is where the theory of comparative advantage comes from. It's like you could also grow your own food. You could weld your own aluminum. But even those are bad examples because it's very simple to grow food or weld aluminum. It's just I have a comparative advantage filming a podcast with you. I could do that too, but I can earn more doing this even though I might be more productive than the plumber, but I should still do the podcast. That's actually less important than what I like to call all the edge cases that lie beneath, right? So like I could theoretically vibe code me some Workday, but what happens in Indiana if the person leaves and they're on maternity leave like all these edge cases where it's just you don't know about them unless you've encountered them in the wild. So a lot of software is just a set of deterministic rules that have been learned from in many cases decades of experience and the rules are not exposed. The rules are kind of embedded and you can't just replicate them. You replicate them through experience. So I think it's like again there are kind of three types of SaaS in my oversimplistic view of the world and then there is this uh-oh like the IP is worthless because everybody's going to vibe code their own thing and I think maybe for certain subcategories if it's a very simple task with no edge cases or maybe you don't need all the edge cases that have been built in I think software is going to do great because it's the true systems of record that have sticky software that people rely on that have all of these embedded edge cases, they're going to start adding AI where AI does the work, right? It's like Workday will say do you want us to do a background check, Intuit will say do you want us to go collect on your outstanding accounts receivable, you don't have to go hire humans to do that, you go hire your software to do these tasks. That is starting to happen but when that does happen the present value of future cash flow, that's going to go up a lot. And I just, it's astonishing to me that a lot of public market investors, they can't tell the difference between these different buckets and they're not giving any kind of, they're very excited about AI, but how do you deploy the AI? You have to deploy the AI through software that's a system of record. I think it's a fascinating time for everyone getting to first principles of what a business really does. So you have all these views, right? I personally hate the system of record thing because it sounds like, oh, a system of record is just like a database sitting there. It's very static. I put stuff into it and I pull it out and that's it. And that views a business as a set of filing cabinets in a very sort of industrial era kind of world. Right now that was very different than the pre-industrial era of a business. So totally it had a value. And I get why we have the term system of record but it feels a little bit like why we have a floppy disc icon as the save button, right? Where my kids like what's that? And I'm like that's a disc. And they're like what is that? And I'm like oh you've never actually physically seen a disc but you still have this icon. You know what the save button does. And the reason I'm questioning this is to me businesses are a set of processes. They're not a system of record. Like these are all process-based systems, right? Everything Alex has just said is totally true, but there are processes like reference checking or other things. And your ability to coordinate a set of processes to happen as cheaply and efficiently and quickly as possible is actually in a knowledge business, not an industrial era business, but a knowledge era business, your entire business. Right? I have 10,000 plus people who walk into buildings every day and bring their brains and walk out and take their brains with them and that's it. I don't have any atoms. I don't have any bits. I don't stamp any steel. I don't even have any filing cabinets, I don't think. Right. And I am all about coordinating the sets of processes, which I think most modern businesses probably are. Right. When you get to how does that relate to Alex's commentary? I think it's totally true. We have different types of processes within a business. There are what I like to call input constrained and output constrained processes. The customer service example with Zendesk, that's input constrained. Your customers ask a certain amount of questions. How quickly you process those is about your efficiency, cost, speed, quality of running that queue. If you do it 10 times as fast, you don't get 10 times as many questions, right? Like you have so many customers, there's a relationship or a ratio. For every customer, they ask five questions. How can I make them ask less questions or process questions quicker? Right? There's actually a lot in a business that is an input constrained kind of a process. I always use our legal team as an example, right? Their job is not to generate legal work. It is to answer it. So how many leases do we have? How many NDAs? How many contracts? It's like a fixed total set. And for that work, I'm trying to do it as efficiently as possible. And you have one entire vector for that set of processes. But then I have kind of output constrained work. If I think about anything creative, marketing, I would argue software development, technology, where I can theoretically do an unlimited amount of tasks, right? I'm constrained by my creativity if you like and how many things I can think of to do, how much value I can deliver for my customers. Those are actually where I'll take the efficiency gain and probably do more output rather than limit input within the bounds of making my company profitable and all these sorts of things. The challenge is to look at a business and try to make this analysis from the outside because all of your input constrained processes and output constrained processes actually work together to make a business and they all have to kind of liaise in all these interesting ways and that's why you see weird pieces of software that are just coordinating quote unquote humans are running processes and what you're saying about Indiana is totally true because some of those processes have outside rules. We call them laws, governance, compliance that I have to do. In Indiana, I have to do a certain thing for employees. So, the processes are both how I want my business to run and how it has to run. And the business is really just a collection of all these processes put together. Like, I'm just saying it's a totally different view from the sort of we have a system of record and a system of action or whatever. And I'm like, that's not how I think most businesses actually run, but it's often how we think about it.
I totally think that's a great framing. Like despite the fact that I love Intuit, it's like TurboTax. Well, like the tax code is published, right? You can download all of these rules. It's highly deterministic and then your files are in your messy downloads folder and it's like make those two happen. In that case, it's like one of these bizarre situations where everything is actually transparent in terms of the processes. I think it's actually a quite rare situation where the edge cases are published in like maybe one place or maybe 50 places, but it's like, oh, you just there are 50 states in the United States of America. Each one has its own tax code. There's the federal tax system. They have a tax code. Go download that stuff and make it work. And there probably are still edge cases and processes that you learn versus like the real world normally isn't as neat as that. It's just like you learn by doing. And a business has value. I mean there are a lot of businesses where theoretically, this is where it's like you would say like all the assets leave every night because they go down the elevator and they go home like that's more knowledge economy type things but actually these businesses do have value like does McKinsey have value outside of all of the employees that work there because that's a knowledge economy business where they produce outcomes and it's tied to labor it's not like a product but still they probably have some top secret handbook that they use around how do they hire people how do they fire people how do they produce outcomes for clients and so on and so forth. I haven't seen it and that's actually great that I haven't seen it because I can't replicate it and it's probably been built over a hundred years. And what is it that non-digital non-software products do? What is their product? Their product is the accumulated knowledge from potentially centuries or decades. I love going to Japan and you see like oh this noodle store has been around since like 1587 and it's like yeah there's probably something going on there. It's like this accumulated set of culture and knowledge and know-how besides here's the recipe list for making noodles. Maybe a bad example because making noodles is a little bit easier. Probably not as many edge cases. I don't know. Maybe there are edge cases. Like what happens if you run out of flour? What do you do? How did the noodle shop survive the great flour shortage of 1623? They probably did something and that's accumulated in this secret book of know-how as opposed to I'm just going to replicate something where all of the rules are published to the public.
Or maybe Intuit. Again, this is where I think it's so fascinating. It forces us to rethink our businesses, right? Is Intuit filling out the tax code for you or does Intuit know the tax code as well as anyone else can? What they're helping is you to take your life data, your understanding, they're asking you the right questions. Intuit's almost more like a McKinsey. It can be considered that way. It's their process and their special ability is how to ask you the right questions to fill out the tax code rather than the filling out of the tax code.
Right. And all these businesses are having to look at maybe I have 50 processes internally that I think are my secret sauce and unique. Maybe only 20 of them are, but now I have to really consider which of those processes are actually unique and which are not because we haven't had to think about it in that manner before.
I think it's also kind of a question of how there's this Goldilocks zone probably of like is it worth doing yourself versus not. Like if you take this kind of independent variable of should I now Claude Code myself some X. Well, if it's like 99% of my cost and my business is going to fail because this evil company is overcharging me for software, it might make sense. If it's like a dollar a year, it probably doesn't make sense. And then not all systems of record are the same. So I kind of think of a system of record as like the atomic unit of something for a business. Like calendars are a system of record for time. Or ERP is a system of record for inventory. You have all these different systems of record, but the example that I was giving somebody is if I have an office in Miami that I don't go to very often and there's a system of record for conference rooms. There is a system of record for conference rooms. It's like Google Calendar. Am I willing to change that system of record? Yeah, because it's like my Miami office, they only go once a year. Like who cares? Versus this is something that touches my revenue. It's not that expensive. Am I really going to grow my own food for something where, actually this is the cool thing about farming, right? If you kind of take that metaphor, it's actually a lot cheaper to go to a restaurant. If I just want one hamburger versus get myself a cow and feed the cow and wait, it's just a lot of food is actually cheaper if you consume it in a restaurant because of comparative advantage and economies of scale. So there probably are systems of record where there's some outside of any of the factors that we're talking about, they're more susceptible just because they're overpriced or they're just not as valuable in terms of what it is that they're storing and keeping records for. I mean like Carta keeps track of cap tables for a lot of companies. How often do you access your cap table? Not very often, but it's super valuable. You can't f that up, right? I'd probably rather use Carta for that and they don't charge me that much money. Sure I'll use Carta. And it's not a daily use kind of product. So, it's not even like that dimension.
I think the vibe coding thing is so fascinating to me because yeah, so someone in software like oh people are just going to vibe code all these replacements to tools. I'm like the idea I would vibe code my own Workday and then run it is terrifying. I have some really smart engineers. Firstly, I have other stuff for them to do. Secondly, I'm like wait I feel like that has way more downside than upside for me. However, and so that's the sort of replacement theory. There is a great gain we are seeing internally in extensibility of software using things like vibe coding. So most of these applications are highly configurable, customizable, in our case all the way through to true extensibility. You can write pieces of software, apps that run on top of our platform that have all sorts of different areas, and lots of customers do, but those customers need to put a technology team on doing that job. Their ability to quote unquote vibe code extensions, customizations, very tailored applications to their very specific use case of something. I want an app for the Miami team to do conference room booking and Miami has some weird HR policy. So that app needs to look at Workday and this and that. It's used by 20 people. I probably wouldn't have been able to afford to put the IT team internally on building that because the bill would have been too big. But now maybe I can build that, right? But that uses Workday's data and rules around the world underneath. But it just gives me a very custom interface for I don't know the person on the front desk in Miami to do something very specific to what they need. That is super powerful, but it's not a replacement for Workday. Poor Workday. I feel like Anil is like the butt of a lot of these conceptual examples. That's really powerful, right? That actually makes Workday stickier in the enterprise and more valuable because you can build all these applications on top, which is the power of AI and vibe coding and creativity to make it more tailored for what I need. But we're going to have to be really careful about these sort of layers of stability and rules and process versus customization, right? And you could argue, I don't know, OpenClaw and stuff is an example of building very personal apps just for me. Most of those people aren't software developers. They're building apps that work just for them on top of their Gmail or something else, right? But it still uses Gmail as a Rails. They still go to Gmail to read their email and do their email, but they build some specific thing for themselves to solve a problem they have and probably only they have. A couple of them maybe turn into companies. Most of them are just solving some stuff that they needed themselves. That's it. And that's great. That's really powerful.
That's why I'm curious about maybe I'd call it my bucket too of this pricing fairness where the back end is not the front end. So if you think of Salesforce, they charge for licenses. Like I think we have 600 people at our firm. We might have 600 Salesforce licenses. I've never logged into Salesforce, but I bet we pay for me. But I use the output of it sometimes because it actually is the system of record. Not to overuse that term, but it stores all of our relationships, but I am part of a table in a relational database of it's like I'm user ID number 422 here and then whenever I meet with a company, like oh well user ID 422 is matched in this other database, but we really just want to pay for a database. So in a world where the front end is not the back end. I mean that's the thing. It's like for Workday, I kind of think they've come up with a very clever pricing trick. Trick undersells it. I mean I think it's a powerful pricing paradigm that feels fair. It's like the more employees that you have. And why is that fair? Because GE has more profits than a 10 person company. GE is going to pay more for this thing. It's still a drop in the bucket. It's totally within the Goldilocks zone of pricing. And I don't think anybody's going to vibe code that. They're going to add all this AI revenue, but most importantly, their pricing feels fair. Whereas for these things where it's like the front end is somewhat divorced from the back end, that one is I don't know what's the fair format for pricing like what will happen to software pricing and obviously like if nobody's going to vibe code their own thing and there's not going to be any
Competition then pricing will stay unchanged, but you can imagine a world where people are building things on top to read from the database, right? Because a system of record has a database that represents the abstraction layer beneath everything. Will there be any pricing pressure on any of these categories?
