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    Avangate transition to_saa_s_-_whitepaper Avangate transition to_saa_s_-_whitepaper Document Transcript

    • Transition to SaaS:Promises, Pitfalls, and Planning forSuccess V 1.0
    • Software is eating the world. - Marc Andreessen50% of ISVs will FAIL ONCE before rolling out a successful SaaS strategy. - Montclair Advisors 2
    • Table of Contents1 Executive Summary ................................................................................................................ 42 Background and Context for Making Decisions about SaaS .................................................. 53 SaaS: Understanding the Case For Change ............................................................................ 64 “SaaS-ification” Models .......................................................................................................... 8 4.1 Simple Software ........................................................................................................... 9 4.2 Customized Software ................................................................................................... 95 Why Move to SaaS Now? Drivers. ........................................................................................ 116 Transition Archetypes ......................................................................................................... 13 6.1 Traditional .................................................................................................................. 13 6.2 Hybrid ......................................................................................................................... 14 6.3 Cross-Over .................................................................................................................. 14 6.4 Pure SaaS.................................................................................................................... 147 The 5 Steps of a Successful Transition to SaaS..................................................................... 15 7.1 #1 – Start with the End in Mind ................................................................................. 15 7.2 #2 – Think Customers First ......................................................................................... 17 7.3 #3 – Build a Lead Machine ......................................................................................... 19 7.4 #4 - Sell a Service, Not a Product ............................................................................... 21 7.5 #5 – Drive Customer Success ...................................................................................... 228 More than Subscriptions ...................................................................................................... 249 Summary .............................................................................................................................. 2510 About Avangate .................................................................................................................... 26 3
    • 1 Executive SummaryTraditional software firms are in a bind. The software business model and technology deliverymodels that they once knew and cherished are undergoing massive shifts due to the rise of theCloud, and subsequently Software as a Service (SaaS). And SaaS is clearly a trend, not just a fad.The choice that emerges for traditional software firms is stark: adapt or slowly fade away.While there is plenty of software industry guidance regarding SaaS practices, most of thisadvice is primarily applicable for companies that were “born in the cloud” and have used SaaSsince their inception. This paper is designed to help existing software firms who may bestruggling to become SaaS providers develop a proactive plan for a successful transition toSaaS.This whitepaper details the broad trends that are driving the software industry toward SaaS;provides an objective framework to determine what shifts may be necessary for a particularcompany; and outlines the critical questions that will help define the end-state of any SaaSproject. The paper also clarifies that the end-state of a project cannot always be pre-determined because it is dependent on the readiness of the software firm in question.Finally, the paper provides pragmatic, customer-focused tips for making the shift to SaaS. Thebest practices provided in this paper have been gleaned from our collective experienceproviding eCommerce services to several thousand independent software vendors (ISVs).The software industry is undergoing a massive shift to SaaS. Your customers’ success and yoursuccess are much more closely linked than ever before. Adaptable competition, high customerexpectations, and low barriers to moving are disrupting software markets. The need exists, andthe time to start seriously considering a shift to SaaS is now. 4
    • 2 Background and Context for Making Decisions about SaaSIs it time for my company to make the shift from traditional software deliverymethods (such as physical and electronic downloads) to providing SaaS andCloud Services?If you are in the software business, the amount of press and buzz around SaaS can make youfeel left behind and raise questions about the effectiveness of your current software deliverystrategies. You’re likely asking yourself whether it’s time to make the switch to SaaS.It’s clear that the SaaS revolution hasalready started. Leading analyst firmsare actually forecasting an increase incloud services spending, even in theface of a global economic slowdown.This means that the need to decidewhether to use SaaS is more pressingthan ever.In the onslaught of pressure on current business models, some companies retrench inoptimizing current business models, whereas others seek a framework for making an objectivedecision about SaaS. Making this decision involves weighing various aspects of a company:current state of maturity, organizational readiness, business model and profitability,technology disruption, and more. It’s a complicated decision to make, but understanding someSaaS basics will help immensely. 5
    • 3 SaaS: Understanding the Case For ChangeWhat larger changes are resulting from the industry shift to SaaS?Companies that haven’t already made aninformed decision about SaaS must do soquickly, or risk being left behind thecompetition. The pace of industrydisruption is rapid for software delivery:distribution for the entire market isexpected to flip, from two-thirds physicalsoftware delivery to two-thirds non-physical delivery in just 4 years! Thissignificant shift will require careful planning to accommodate.There are several important ripple effects of this accelerated industry disruption: Customer expectations are changingToday, software vendors are dealing with a highly sophisticated buyer who is much moreaware of the many products and services available than ever before. Buyers are in control.They demand to purchase software when they want it, and have it delivered by their preferredmethod. Vendors that can instantly gratify buyers with instantaneous purchase and deliveryacross multiple channels are in the best position to succeed. 6
    • Pay up front is being replaced by “pay-as-you-go”Another fundamental change involves the shift from perpetual licenses to usage-basedsubscriptions, a core feature of SaaS companies. Irrespective of the macroeconomic drivers forthis shift, subscription-based service is a reality that needs to be factored into the profitability,sales models, and cash flow of any software company adopting SaaS. New distribution is complicating discoveryDistribution becomes another critical issue as the many factors involved in getting a softwareproduct to market are democratized. It is cheaper to start a software business now than at anyother time in history, due to affordable computing power, storage, and bandwidth, as well asopen source development tools. With so much competition, the hard part mostly lies in theability to be “found” by customers. Companies may leverage marketplaces, affiliates, appstores, direct eCommerce, channel partners, or a combination of all of the above to sell andpromote their products. 7
    • 4 “SaaS-ification” ModelsWhat challenges and opportunities will my company face as we work toward aSaaS model?To better understand the process and challenges of putting SaaS in place, let’s create a modelto help frame the current trends and players. As shown in the figure above, the “SaaSification”model has two axes: Software Type: Simple Software <--> Customized Software Delivery Type: SaaS <--> ESD/On-Premise Software 8
    • The companies shown in each quadrant provide some context for understanding thecharacteristics of the various software types, which are defined in more detail below.4.1 Simple SoftwareSimple software has the ability to solve specific problems very well. Simple software istypically: Focused on B2C services: mail, storage, productivity, entertainment, etc. Sold online via application stores First to be SaaS orientedKey Challenges for Simple Software Getting attention in a world of exploding competition and channels Monetizing the product4.2 Customized SoftwareCustomized software tends to solve complicated, enterprise-wide problems. Think of thesolutions offered by companies such as Oracle and SAP. Customized software is usually: Focused on B2B issues such as Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), Human Resources (HR), or Finance Distributed by a combination of direct sales force and Systems Integrators (SIs) or Value Added Resellers (VARs) that form a complex, interdependent sales ecosystem Installed “on-premise” in target enterprises’ data centers by IT staff 9
    • Key Challenges for Customized Software “Consumerization of IT”: buyers expect to consume applications with the ease of simple software while getting the results of customized software Disruption by simple software moving “up the stack” to serve the needs of the lower end of the business spectrum with benefits such as increased configurability and simpler pricing Ability to offer a customized platform, which usually involves a big investment in customizing SaaS toolsSoftware vendors have to choose where to position themselves to maximize opportunitieswithin the quadrants shown: simple or customized software, delivered by SaaS or ESD/on-premise.A growing separation of customized and simple software is happening at all levels of thesoftware industry. Simple software reflects widespread growth in online access as well as thelower costs of development, delivery (ESD or SaaS), and distribution. Online distribution hassignificantly opened up the simple software markets to include: App(lication) stores Affiliate programs Search MarketplacesSimple software is a growing market that doesn’t benefit only consumers. The“consumerization of IT” has opened up enterprises to using simple applications that can bepurchased online, whether directly on the vendor’s website or an enterprise app store. 10
    • The customized software market, which consists largely of platforms extended by SIs for usesspecific to a particular company, is just beginning to open up to SaaS models.These customized platforms reflect growing bi-modal markets that raise questions about howcompanies can participate in the growing ecosystems of solution providers. Options mayinclude Becoming a platform, which requires substantial upfront capital investments in frameworks Playing in another ecosystem, and investing in distribution for “discoverability”Both simple and customized software companies can benefit greatly from moving to SaaS, buteach type of company faces different challenges when making the transition.5 Why Move to SaaS Now? Drivers.The SaaS model has been proven and is maturing rapidly. Some general drivers of theimmediate need for transition for SaaS include: Customer readiness Ability to accelerate product evolution in fast changing markets with fast deployment Benefit of scale economics in high growth markets Disrupt new markets – no implementation or hardware requirements Potential to improve company valuation: the multiples accorded to SaaS companies are higher than traditional software firmsIn a recent survey, software vendors using the Avangate platform confirmed the popularity andeffectiveness of the shift to new business models: Over 45% use subscriptions 23% made more than 50% of their revenue from subscriptions 11
    • Other companies are in various modes of transition – some using SaaS, some experimenting with hybrid models that incorporate subscriptions and ESDPerhaps surprisingly,many companies are stilltrying out subscriptionsto evaluate differentSaaS-based businessmodels, such as freetrials, paid trials, yearlyrenewals, and evenmonthly renewals. Themove towards SaaS hasalmost mandated themodel of trial with awidespread expectationof being able to “try before you buy.” The free trial model can be a good first step towardimplementing SaaS, but requires careful planning to ensure that it boosts business. 12
    • 6 Transition ArchetypesTransitioning to a SaaS model starts with choosing the end state you want to achieve. It’simportant to note at this point that SaaS may not be the best end state for every scenario.There are 4 key end states that we have developed based on some excellent work done by ourindustry colleagues. These states are: Traditional, Hybrid, Cross-Over and Pure SaaS.Inspired by Montclair Advisors with further interpretation by Avangate6.1 Traditional 13
    • Most traditional software companies remain concentrated on perpetual license sales in an on-premise delivery model. This is especially common among mission-critical applications and inhighly regulated verticals such as Finance, Insurance, and Pharmaceuticals. There is limited, ifany, incentive to transition to SaaS for entrenched players, and any such transition will becomplex. However, deregulation offers many opportunities for disruptive players to emerge,and SaaS always remains a possibility for future developments.6.2 HybridThe primary driver for considering a hybrid state is to extend the value of the current platforminvestments. The hybrid model exists when there are no distinct products for both the existingcustomer base and net-new prospects. Customization capabilities remain limited in this model,which is applicable in very few scenarios. Some infrastructure vendors promote this modelfrom a perspective of creating virtual appliances, and a hybrid structure may also be popularfor hardware cost savings programs.6.3 Cross-OverAn advanced end-state is the cross-over, which involves a conscious decision to make abusiness model shift toward SaaS. In this case, all new customers are on-boarded to the SaaSversion, but current customers are not immediately migrated over. The primary driver for thisstate is, of course, competition, which may or may not be nipping at a company’s heels andimpacting real revenues. It is critical in this state to ensure current customer satisfaction whilesimultaneously ensuring that cash flow is not impacted by the transition. In addition, cross-overcan be an interim state for companies looking to improve company valuations by using SaaS.6.4 Pure SaaSPure SaaS firms are, by definition, young companies that are “born in the cloud.” These firmsare not encumbered by legacy architectural decisions with costs being paid by other firms in 14
    • the previous states. While pure SaaS companies may enjoy more flexibility to deploy theirproducts, they may also face larger challenges in finding a reliable customer base and inachieving efficient channel operations.7 The 5 Steps of a Successful Transition to SaaSWhat steps can I take to ensure that my SaaS transition is successful?7.1 #1 – Start with the End in Mind 15
    • Choose the model that best fits your needSee the previous section of this paper to determine whether your company should use atraditional, hybrid, cross-over, or pure SaaS model, and understand the implications of each.Segment your customers 1. What segment makes the most sense to begin the transition: current customers, new segments, or current customers with different needs? It is usually agreed that new customers are easier than existing ones to move to a new platform without incurring expensive migration costs. 2. What are the well-defined, repeatable parts of your current solution that can move to SaaS and are common over a wide range of customers? How could that component of your solution be offered as a SaaS add-on? Start to experiment and see what works for your customers.Understand your costsYou must understand the costs of both tangible and intangible processes before you decide tomove to SaaS. Decide on and relentlessly measure your key process metrics with the benefit ofreal-time feedback to the organization during the transition, allowing for recalibration andimprovement.Leverage other ‘aaS to outsource non-core componentsOutsource hosting, and plan to exit from the on-premise delivery model, as this cannot bemaintained over the longer term. Even some of the largest enterprise software vendors in theworld have not been able to sustain a dual investment in SaaS and on-premise delivery. 16
    • Automate supportAs the number of customer touch points increase, it will be imperative to invest in a self-service or community network to enable customers to help one another. Otherwise, the cost ofcustomer contact may outweigh the cost savings or increased revenue of SaaS.7.2 #2 – Think Customers FirstIn SaaS, remember that renewals and increased usage become the lifeblood of the business. Itcan be difficult to make the shift from one-time licenses to maintaining a continuous, ongoingcustomer relationship, but the “service” part of SaaS is more important than the “software”part. Providing excellent service at every touch point is required, even when handling manymore support cases than usual. 17
    • Plan specific communication paths with customers, not only for support purposes, but also foreducation. The increased frequency of product releases with SaaS makes it critical to notifyusers what to expect from new features and how to use them. With every release, be sure youcan track what features the customers are using by building instrumentation and analytics intothe platform.Many new business metrics come into play in SaaS. Some of these include: CAC (customer acquisition cost) MRR (monthly recurring revenues) ACV (annual contract value) CSR (customer satisfaction rate)Ensure you are not only tracking these metrics, but setting goals to improve them for eachbuyer profile.Build a customer community with an internal customer champion (providing the voice of thecustomer) to ensure customer requests are assigned the right priority and resources areallocated appropriately.Additional suggestions for driving customer success in the long-term are found in step 5 of theSaaS transition process. 18
    • 7.3 #3 – Build a Lead MachineWith most SaaS companies, the deal sizes tend to be smaller. The imperative shifts fromfocusing on just a few large deals to emphasizing the efficient execution of a greater number ofdeals with a shorter sales cycle. This requires building a full sales funnel through an ultimatelyautomated “Lead Machine” program. Some characteristics of this program include: 1. Freemium modelAllow new prospects to use some version the product for free, if possible. In the new paradigm,usage is the new way to engage, and engagement leads to monetization. Trials and test driveprograms are a good way to get early feedback and ensure that a more focused approach toconversion can follow. 19
    • 2. Land and expandThis strategy refers to building on the trust established by the initial engagement in order towin additional business with the same customer. This approach is no different from thetraditional software world, but can be fine-tuned and accelerated in the SaaS model when youare armed with usage data. This enables the pinpointing items of value that can be targeted forup-sell and customer retention. 3. Make friendsThe best SaaS firms create ecosystems that engage and retain customers. Identifying keypartners for customer acquisition (e.g., companies selling into the same markets and targets),retention, and distribution (channel partners) improves lead flow and ensures a greater degreeof market coverage. 4. Put lead generation on auto-pilotAuto-pilot is the holy grail for software companies, the point when new qualified leads keepcoming in from the established lead generation system. In order to reach this state, you mustclearly identify the buyer personas, the purchase path, and the content arc that preventsprospects from leaving you for the competition. Segment your treatment of customers toensure that each type of customer gets the appropriate level of interaction, from self-service toinside sales or telesales to direct sales. The sales model will depend upon the lead qualificationcriteria established for each channel. 20
    • 7.4 #4 - Sell a Service, Not a ProductAs noted, the “service” part of “SaaS” matters more than the “software” part. This is adeparture from the traditional software world. A key part of the shift in mindset for SaaSinvolves thinking about application programming interfaces (APIs) from day one, leading tofaster, easier to use and purchase components. Customers who use the web and APIs to“mash-up” apps are becoming increasingly common.Services not only allow for new partnerships to be created with exposed APIs, but can also bebundled to create a whole solution for customers. This is reflected also in the shift that VARsand marketplaces are making (creating bundles and additional services) to avoid beingcommoditized. In general, it is impossible to predict which parts of your platform will seedemand and the opening up of key pieces of the platform will ensure that the widest net is castin terms of driving usage and adoption. 21
    • 7.5 #5 – Drive Customer SuccessSaaS shifts the profile of customer advocates from the traditional framework by emphasizingdifferent value points, the most crucial of these being education and communication.EducationTo drive customer adoption of SaaS products, the first step is to educate your prospects aboutproduct benefits and capabilities. There are several popular educational vehicles to choosefrom: ongoing webinars with a content arc that matches your buyer interests, free initialtraining sessions, online resources such as blogs and whitepapers, and sharing best practices ofthe industry during events and tradeshows. 22
    • Self-service portalsThe SaaS model requires that customer support organizations be turned on their head tobecome more market-friendly and encourage knowledge exchange between customers.Increased communication empowers customers to solve their own problems. This can befacilitated by self-service customer portals or communities, several of which are available inthe market (often as SaaS solutions). In addition, creating content to address frequently askedquestions (FAQs) and improving search capabilities will help decrease load into the supportorganization. It is also necessary to proactively and regularly measure customer satisfaction,which also enables rapid identification and resolution of issues. In the process of creating aself-service support community, don’t forget to reach out to the developer community,especially to promote API adoption. This includes creating dedicated forums, code samples,test stubs, and other technical guides that can help drive further adoption among newcustomers.Customer success teamsIn addition to managing customer self-service portals, consider creating dedicated customersuccess teams that are responsible for ensuring product adoption, particularly in strategicaccounts. This additional investment will prove instrumental in ensuring a long-term customerrelationship, as well as improving renewal and revenue predictability. The customer successteam should typically be a cross-functional team that incorporates support, implementation,and documentation staff.Social media monitoring and incentivesRecognize the impact of social media, which is favored by vocal advocates (and detractors), andset up programs for social monitoring. This is a good opportunity to leverage customer successteams to gather social data about customer satisfaction and product usage. Incentive planningfor advocates that involves non-monetary items such as marketing materials, event passes, and 23
    • customer testimonials can help both parties gain knowledge and advocates in the industry.Leverage case studies and nurturing programs on your website to continuously add to the leadfunnel by recognizing customer successes.8 More than SubscriptionsSo does moving to SaaS just mean adding renewable subscription capability to a product andthat’s it? Not at all. As you think about your SaaS strategy, remember that the ability to invoiceon a recurring timeline is just one step in a larger process.Here are a few other items that you need to factor in: Product catalogs; Merchant of Record v/s Service Provider; Payment processor integration; Risk Management; Fraud Screening; Taxation and VAT; Commerce expertise ; Channel enablement; Integrated solution; Cost of integration for a complete business process flow; 24X7 support. 24
    • 9 SummaryThis paper has clarified the reasons for and challenges of transitioning to a SaaS model, definedSaaSification models and transition archetypes, as well as provided step-by-step instructionsfor ensuring customer adoption and success in SaaS. By understanding the opportunities anddifficulties inherent in SaaS, defining your company’s SaaS model and transition archetype, andtaking the appropriate steps to create robust lead generation and customer support systems,you can set your company up for initial and continued success in SaaS delivery.Even as you find your foothold in SaaS, return often to these models, and fundamental steps inthe SaaS transition process. Never forget that customer success on the new model will play themost critical role in establishing the legitimacy of SaaS as a delivery model, and constantlystrive for new ways to find, educate, and convert customers to ongoing SaaS usage. 25
    • 10 About Avangate Avangate is the agile eCommerce solutions provider trusted by Software and SaaS companies to grow their business worldwide through any channel, any model.Specifically designed for software markets, Avangates scalable and integrated solutionincludes a full-featured, modular and secure eCommerce platform, a partner order andrevenue management system, as well as a constantly expanding worldwide affiliate network.Avangates market-proven eCommerce solution enables software companies to rapidlyembrace industry shifts, reach customers effectively, and adopt new business models with aview to optimizing profitable revenue across online and offline channels.More information can be found on www.avangate.com Avangate Inc. Avangate B.V. info@avangate.com Redwood City CA., USA Amsterdam, The Netherlands www.avangate.com Tel: (650) 249 - 5280 Tel: 31 20 890 8080 26