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  • 1.   White Paper Benefits of the SaaS Delivery Model August 2008 Author - Laura McCaughey New Momentum
  • 2. Benefits of the SaaS Delivery Model New Momentum defines software-as-a-service (SaaS) as an application delivery model that is web-based, has a subscription- based fee structure and builds upgrades into the subscription pricing of the application. It is deployed as multi-tenant or single-tenant standard code that is maintained and upgraded by the vendor. Stuart Clifton and Joe Stafford founded New Momentum in 2005 to fill the white space between the value chain management ($7 billion) and product lifecycle management ($14 billion) enterprise applications market, specifically building a collaborative suite targeting enterprise brand intelligence, enterprise sales intelligence, and predictive supply chain risk intelligence. Their strategy to build the New Momentum application suite as a SaaS model rather than as an on-premise model was predicated on their strong belief that in order to keep pace with the risks created by outsourcing and other popular cost-cutting manufacturing techniques, today’s enterprises need a solution that gives them direct, 24x7 real-time access to global internet data. Bypassing the long, costly deployments associated with on-premise enterprise software is equally important, and the subscription-based pricing of New Momentum fills the the SaaS platform makes it easy to get started. All of these factors white space between enable a customer to achieve a faster return on investment (ROI). the value chain management ($7 billion) New Momentum’s enterprise risk management (ERM) solution suite and product lifecycle helps companies reduce risk in several areas, including the management ($14 following: combating counterfeits and gray market sales; gaining billion) enterprise visibility into price, availability and lead-time trends that assist in strategic planning to avoid costly production shutdowns; receiving applications market. early alerts regarding geopolitical events, natural disasters, merger and acquisition activity, or financial conditions that could cause strategic supplier failure; and having accurate and current open market data for better inventory valuations and Sarbanes-Oxley compliance. Such 24x7 real-time access to global internet data is best delivered through a SaaS model. Page | 2
  • 3. Figure 1. The New Momentum SaaS Platform Source: New Momentum, LLC. Source: New Momentum, LLC. Page | 3
  • 4. The SaaS Market Boom is Only Just Beginning IDC estimates that by 2011, the SaaS market opportunity will reach $14.8 billion, a 32% compound annual growth rate. The IDC projection may be conservative: Gartner estimates that the current SaaS market is around $6.3 billion (6% of the software market) and projects that by 2011, the SaaS market will jump to $19.6 billion (25% of the new software market). Supporting these robust growth expectations, according to a report published by McKinsey & Co. in collaboration with the SandHill Group, 74% of more than 850 enterprise software customers surveyed in 2008 are favorable toward adopting SaaS platforms. These same respondents believe that innovation is being driven by two major trends -- SaaS and Gartner estimates that the service-oriented architecture (SOA), which we at New Momentum current SaaS market is believe will continue to converge. around $6.3 billion (6% of the software market) and SaaS Companies a Hot Venture Investment projects that by 2011, the SaaS market will jump to Another key model growth data point is that venture capitalists are $19.6 billion (25% of the investing heavily in SaaS companies relative to on-premise software new software market). vendors; indeed, software continues to lead all other sectors in garnering venture investment. In the second quarter of 2008, software companies garnered $1.25 billion in 219 deals, according to PricewaterhouseCoopers and the National Venture Capital Association. The lofty number of deals completed in software was almost double that of the number-two Biotechnology sector. Figure 2. Quarterly Venture Investment in Software—Dollars and Deals, 2Q06-2Q08 (Dollars in Billions) $1.600 300 $1.504 $1.400 $1.260 247 $1.271 250 $1.271 $1.250 $1.200 231 $1.098 $1.120 220 235 219 $1.095 $1.103 200 $1.000 193 186 195 186 $0.800 150 $0.600 100 $0.400 50 $0.200 $0.000 0 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Dollars Deals Page | 4 Sources: PricewaterhouseCoopers, the National Venture Capital Association, and New Momentum, LLC.
  • 5. M&A Activity Strong in SaaS Space Merger and acquisition activity is robust in the SaaS space, despite the current economic backdrop. At least 35 M&A deals involving SaaS vendors were completed in the first half of 2008. The median multiple for SaaS vendors currently is around 3.1x enterprise value/revenues, compared with 1.8x enterprise value/revenues for traditional license model vendors. According to Saugatuck Technology, by 2010, 40% of traditional independent software vendors (ISVs) will bring SaaS solutions to market through acquisition, development of new single-instance multi-tenant applications, or through virtualized (multi-tenant) versions of their on-premise solutions. However, less than half of these ISVs in transition are vendors that have unique organizational, cultural, sales and marketing, and installed customer base (transition/cannibalization) challenges. We expect many of the smaller ISVs with strong horizontal and vertical SaaS solutions to partner with vendors in complementary spaces or to be acquired by larger vendors looking to build out their SaaS solution set. Successful integrations will occur when the acquiring and acquired companies quickly unify the code base, their cultures “fit,” and together their solutions are scalable to a wider customer base. Succinctly, 1 + 1 must equal 3…or more. Figure 3. Median SaaS versus Traditional On-Premise License Enterprise Value/Revenue Valuations 12 Sources: Software Equity Group, LLC and New Momentum, LLC. 7.8 10 6.3 5.9 8 6 3.8 3.1 4 2.5 2.4 2.4 2 2.0 1.8 0 2Q07 3Q07 4Q07 1Q08 2Q08 Sources: Software Equity Group, LLC and New Momentum, LLC. Page | 5
  • 6. Enterprises are Entering the Fray as LOB Execs Find Solutions for Pain Points The McKinsey-SandHill survey also highlighted that by 2009, companies plan to spend 21% of their software budgets on SaaS solutions. This adoption momentum largely reflects SMB companies, for which the initial deployment costs and ability to pay for what they use on a subscription fee model are quite attractive. Recently, enterprises are gravitating toward the SaaS model for certain applications. There are many reasons for this, chief among them The SaaS applications that that a lot of on-premise software is not used…and companies are are targeted to a specific paying maintenance on this regardless. business pain point will be Another important driver of rapid SaaS adoption is the trend of line the ones to succeed because of business (LOB) executives driving this increased spending. LOB executives have the Gartner estimates that more than 85% of business application SaaS ability to relatively quickly deployments are departmentally focused. Market conditions enable justify the spend and avoid a the business person to buy SaaS solutions, shortening the sales lot of red tape. cycle in any economy. The SaaS applications that are targeted to a specific business pain point will be the ones to succeed because LOB executives have the ability to relatively quickly justify the spend and avoid a lot of red tape. For this reason, the SaaS solution user interface must be user-friendly, as the product is being marketing to someone who likely does not have a technical background. Benefits Have More to do with Results and Innovation than Price According to former colleagues at AMR Research, Christa Degnan Manning and Rob Bois, SaaS benefits have less to do with price and cost and more to do with results and innovation. Christa and Rob interviewed dozens of clients about what they really thought about SaaS. Speed of deployment and value were the most frequently cited benefits of the SaaS delivery model. In addition, respondents stated that the solution has to be easy to integrate. Page | 6
  • 7. The user community also sees great value in the frequent upgrades enabled by the SaaS model, whether it be bug fixes, customer requests, or new features. In addition, the “outside-the-firewall” nature of SaaS has expanded the number of business process automation areas that can be improved, most notably sourcing and purchasing. This network effect also can be found in the availability of best practice and benchmarking services provided by the SaaS vendor, based on implementation approaches and use patterns across all subscribers in aggregate. For example, some procurement management system SaaS providers have offered rate guidance based on geographic location. This advantage can’t be matched by on-premise products. Finally, many customers report that they are enjoying the benefits of a quick return on investment (ROI) from their SaaS solutions. For example, New Momentum’s enterprise brand intelligence product was in place at a customer for one month. The study tracked ten products. During that time frame, gray market activity on those ten products was a whopping $6.5 million, and suspect activity was $3.2 million. On an annualized basis, this suspect activity reached close to $39 million. KPMG estimates that about 10% of all high tech products sold globally are counterfeit. Thus, shutting down counterfeiters on these ten products alone – and projections are that about 25% of suspect activity can be recovered – would add $9.7 million back to the customer’s revenue line. Application Area Growth Horizontal Solutions Widening… Most people are aware of the tremendous success of SaaS customer management (CRM) vendors and RightNow, and SaaS human capital management (HCM) vendors, SuccessFactors, and Taleo. Indeed, CRM and HCM (particularly in performance management and recruiting) were the early horizontal leaders in the space. Page | 7
  • 8. NetSuite offers enterprise resource planning (ERP) and CRM application software focused on the mid-market. The SaaS ecosystem also encompasses consulting and implementation, product development, and delivery-related managed services. Collaboration (email and web conferencing, for example) is also a first-mover horizontal space. Now, we are seeing knowledge management/collaboration, business intelligence, sourcing and procurement, supply chain management, and mobile computing as particular growing areas of horizontal SaaS strength. Figure 4. Horizontal SaaS Adoption Graphic Software Segment SaaS Solutions Customer Management (CRM) Education Enterprise Resource Planning (ERP) Entertainment Human Capital Management (HCM) Knowledge Management Outsourcing Performance Management Product Lifecycle Management (PLM) Security Supply Chain Management/RFID (SCM) Supply Chain Planning Systems Management Wireless Storage Source: New Momentum, LCC. …and Vertical Solutions the Future The future of SaaS vendors will be in vertical industry solution areas, which will spur more vertical business networks. Currently, these networks are in place in manufacturing, healthcare, financial services, and a few other industries. As vendors become more specialized in specific verticals, the horizontal solution set will be more scalable and repeatable, ever widening the prospective customer audience. Page | 8
  • 9. Figure 5. New Momentum -- Current and Future SaaS Vertical Markets and Networks SECTOR/Industry  ENERGY  CONSUMER DISCRETIONARY  Retailing  SOFTWARE  Energy  Automobile & Components  Distributors  Technology Hardware  Energy Equipment & Services  Auto Components  Internet & Catalog Retail  & Equipment  Oil, Gas & Consumable Fuels  Automobiles & Motorcycles  Multiline Retail  Communications    Specialty Retail  Equipment  MATERIALS  Consumable Durables & Apparel    Computers &  Materials  Household Durables  CONSUMER STAPLES  Peripherals  Chemicals  Consumer Electronics  Food & Staples (Drug) Retailing  Electronic Equipment,  Construction Materials  Home Furnishings  Food, Beverage & Tobacco  Instruments &  Containers & Packaging  Homebuilding  Producers  Components  Metals & Mining  Household & Personal Products  Office Electronics  Paper & Forest Products  INDUSTRIALS  Household Appliances  HEALTH CARE  Semiconductors &  Capital Goods  Housewares & Specialties  Health Care Equipment & Services  Semiconductor Equip.  Aerospace & Defense  Leisure Equipment & Products  Health Care Equipment & Supplies  Semiconductor Equip.  Textiles, Apparel & Luxury Goods  Semiconductors  Building Products  Footwear  Health Care Providers & Services  Telecommunications  Construction & Engineering  Services  Electrical Equipment  Consumer Services  Health Care Technology  Telecommunications  Industrial Conglomerates  Hotels, Restaurants & Leisure  Pharmaceuticals, Biotechnology &  Diversified  Machinery  DIVERSIFIED CONSUMER SERV.  Life Sciences  Telecommunication  Trading Companies &  Media  Biotechnology  Services  Distributors  Pharmaceuticals  Wireless  Commercial & Professional  Advertising  Life Sciences Tolls & Services (Med  Telecommunication  Services  Broadcasting  Tech)  Services  Commercial Services &  Cable & Satellite      Supplies  FINANCIALS  Professional Services  Movies & Entertainment  INFORMATION TECHNOLOGY  UTILITIES  Publishing  Software & Services  Transportation    Internet Software/Services    Air Freight & Logistics  IT Services  Airlines  Marine  Road & Rail  Transportation Infrastructure  Source: New Momentum, LLC. Page | 9
  • 10. The Customer -- How to Keep Those Revenues Recurring A successful SaaS company gives users a clingy customer experience, enabling a predictive revenue model. Pricing tends to be competitive in order to onboard the customer. SaaS is perceived to be a lower-cost sale than an on-premise sale, and SaaS vendors must be careful that this actually proves to be the case. SaaS customer satisfaction is a definitive must in a SaaS solution. It’s too easy for a customer to rip out a solution and put in a new one, negating the underlying financial positives of the SaaS model’s predictive recurring revenue stream. For that reason, SaaS vendors must keep their customers happy. SaaS vendor profitability depends on a vendor’s ability to “land and expand.” Inevitably, there will be some churn. In order to increase annual revenues, a vendor must increase the annual subscription value (ACV) at any given customer. Much has been written about the profitability potential of a SaaS company. We strongly believe that a SaaS vendor – no matter if a start-up or a public company – must keep sales and marketing step-in-step and keep a tight rein on expenses. When marketing and sales are working together, the unified effort typically gets the revenue ramp going. This is critical, as monthly recurring revenue (MRR) is a primary driver of the equity value of a company. Once revenue is ramped, the SaaS vendor should look to generate cash, another big positive in terms of a company’s equity value. SOA Supports SaaS Web 2.0 Technologies As we said earlier, SaaS and SOA are converging. Speak with a seasoned IT veteran, and you will hear that companies have been employing SOA for many years – they just didn’t call it that. In a nutshell, SOA is about agility and flexibility and supports Web 2.0 technologies, which promotes many aspects of the SaaS model. Initially primarily prevalent in financial services and telecommunications companies, SOA has become more mainstream and is being deployed across many industries. According to AMR Page | 10
  • 11. Research’s Ian Finley and Koppel Verma, however, a lot of companies are just beginning to take a SOA approach, which should lead to burgeoning growth. They believe that the main effect of SOA is changing the competitive forces in existing market segments, rather than creating large new ones. Figure 6. New Momentum -- SaaS/SOA Architecture Graphic Enterprise Brand Intelligence Customers  New Momentum Website ‐ Services Data Collection Engine Cleansing Content Caching and Imaging Source  Source (Site) Source (Site) Source (Site) Source (Data) Source (XML) (Email) Schema Schema Schema Nav Nav Nav Source: New Momentum, LLC. SaaS Platforms The most important aspect of SaaS platforms is that they must be configured to best support the user. Platform development and maturity will continue to be a customer-driven model – one that must provide winning economics for both parties. In order to accomplish this, vendors must enable the user to modify or develop their own applications; provide an environment in which these applications can be delivered quickly and at a lower cost than a traditional application; and provide a means for the user to be part of a broader community and collaborate with other users in the ecosystem. A SaaS platform inherently must support multi- tenancy. Virtualization supports the multi-tenant community’s sharing resources and can increase capacity exponentially and economically. Page | 11
  • 12. SaaS platforms can be grouped in three ways: delivery platforms, development platforms, and application-led platforms. Delivery platforms are either managed hosting or cloud computing (see more on this topic below). Development platforms are either traditional, cloud-, or mash-up-based. Finally, application-led platforms enable the customer to use tools either to customize the vendor’s original offering or build new applications on the platform. New Momentum is Positioned for the Future: Cloud Computing We are in the nascent stages of the SaaS application being built “in the powerful cloud.” The Platform as a service (PaaS) enables the provider to be responsible for the development environment and infrastructure, as is the case with some examples like’s, Amazon’s EC2, NetSuite’s SuiteBuilder, Google’s App Engine, and Ning, a social network platform. To us, these benefits look like even further enhanced cost-savings and, thus, higher profitability for the customer company. The cloud environment is particularly beneficial to smaller companies that couldn’t afford to have the computing power that the cloud offers. We also believe that cloud computing will spur even more solution verticalization because so many more people globally will have access to tools and unimaginable computing power, leading to breakthroughs we can only dream about today. Page | 12