Montclair Advisors/SIIA - Best Practices for SaaS Transitions


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Published in December 2010 by Kevin Dobbs , Managing Partner at Montclair Advisors, in association with the SIIA - Challenges & Best Practices Associated
with Transitioning to the SaaS Model provides tips and tricks will help in building a successful SaaS company.

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Montclair Advisors/SIIA - Best Practices for SaaS Transitions

  1. 1. SIIA ISSUE BRIEF Challenges & BestPractices Associatedwith Transitioning to the SaaS Model CLOUD COMPUTING DEVELOPED BY THE SOFTWARE DIVISION OF THE SOFTWARE & INFORMATION INDUSTRY ASSOCIATION (SIIA) Copyright © 2010. All rights reserved.
  2. 2. Challenges & Best Practices AssociatedSIIA Issue Brief with Transitioning to the SaaS Model Challenges & Best Practices Associated with Transitioning to the SaaS Model Author: Kevin Dobbs, Montclair Advisors, LLC Contributors: Keri Brooke, Host Analytics Transitioning Business Challenges According to Gartner, the Software-as-a-Service enterprise application market is forecast to have a 15.3% compound annual growth rate through 2014 for the enterprise application markets, compared with total application market compounded growth rates of only 5.3%. It is this type of growth and adoption that is causing many traditional Independent Software Vendors (ISV’s) to seriously consider transitioning their business models to SaaS. This transition is obviously easier said, than done. According to our informal research, close to 50% of all ISV’s will fail at least once before rolling out a successful SaaS strategy. What is interesting is that 35% of all ISV’s are currently in the process of trying to move their business to SaaS according to Saugatuck Technologies. Gartner also predicts that by 2012, more than 66 percent of all ISV’s will offer some of their applications through a SaaS model. Since this type of business transition is complicated, this white paper will highlight challenges, provide ideas and best practices to help readers through this transition. This sounds basic but many software companies don’t really know how far they plan to go with their SaaS business model. Will your company go all the way and convert 100% of your business to multi-tenant subscription solutions over time or will you continue to offer on premise software as well? This diagram is helpful with speaking with your team to determine where your company fits along this Software Continuum. SOFTWARE CONTINUUM Business Model Traditional Hybrid Cross Over SaaS Strategic Intent On-premise Focus LT both on- LT move to SaaS Exclusively SaaS Drivers: Large on- premise & SaaS Drivers: Competition, Drivers: Newer premise customer base, Drivers: existing customer new markets, products business, competition, market or solution type base, new & existing or company value products or markets markets or solution type Customer Selection • Enterprise • Enterprise & SMB • SMB > Enterprise • SMB > Enterprise Value Capture • Perpetual License • License & • Subscription • Subscription • Services Subscription Services Strategic Control • Long term license deals, large replacement costs Deployment Traditional Hybrid Cross Over SaaS Deployment Time • Months or Years • Weeks or Months • Days or up • Minutes > Weeks to Months Customizability • Complex • Customizations & • Configurable • Highly Customizations Configurations configurable Integration • Difficult to integrate • Moderately • Packaged • Packaged Difficulty complex to itegrate integration integration Figure 1: Software Continuum, Montclair Advisors, 2010 2
  3. 3. Challenges & Best Practices AssociatedSIIA Issue Brief with Transitioning to the SaaS Model Depending on your company’s strategy - Traditional, Hybrid, Crossover or Pure SaaS, this should help to focus your game plan. Keep in mind that a complete SaaS transition can take anywhere from 3-5 years to complete, so it is recommended that companies break their plans into 12 month phases. For a company just looking to launch a Hybrid model, offering both deployment options, the timing for transition might be less than for a company looking to do a full transition to SaaS. A new SaaS start-up takes about 5 years to break-even financially and most venture capitalists are looking at about 7 years before their SaaS companies could possibly go public. On average, building a successful SaaS firm takes about $35M in investment before reaching an IPO, so it is important to be prepared to invest in the transition as you shift from a perpetual model to a subscription model. Changing the Culture As companies approach transitioning their business to a subscription business model there are a number of challenges, and one of the biggest is creating a new customer-centric culture. One of the key aspects of this new culture is an intense focus on putting the customer’s satisfaction first. This attention on adoption and satisfaction is vital in ensuring that customers not only use the SaaS products but also renew and extend their annual subscription. In building this new culture, it is really helpful to hire executives and managers who really understand how to deliver a software service. Changing the DNA of your company requires injecting fresh team members into the mix who have solid SaaS experience. Be aware that an “A” player in a traditional software business model might only be a “B” or “C” player in a new SaaS business. In addition, to new team members it is also important install new business processes and systems that support the new SaaS model. Along with these new processes, best-in-class companies run their businesses by monitoring key performance indicators or what are often referred to as SaaS metrics. Some of these metrics include Customer Acquisition Costs (CAC), Monthly Recurring Revenues (MRR), Cost of Goods Sold (COGS), Annual Contract Value (ACV), Customer Satisfaction Rate (CSR) and there are many others. These metrics provide a more precise way of judging the effectiveness of specific SaaS business processes, which ones are working and which ones need to be tuned. Building very strong customer relationships is another change from the traditional model to SaaS. A popular way many SaaS firms do this by creating vibrant customer communities that can work to deliver product ideas, best practices content and even user support. This customer-centric approach is a major difference from the traditional software business model. 3
  4. 4. Challenges & Best Practices AssociatedSIIA Issue Brief with Transitioning to the SaaS Model Subscription Software Products Over the past five years, there has been a clear convergence between consumer Internet products and desire of enterprise software customers to use products that behave more like Facebook, LinkedIn, eBay and Because of this change SaaS companies are striving to create products that are easy-to-use, but that are built on in truly scalable way, like the consumer products, like Zynga, that are now supporting millions of users. By leveraging a scalable, multi-tenant platform, SaaS providers can take advantages of dramatic development efficiencies. Fewer resources are required to maintain multiple versions, databases, operating systems and middleware, so development teams can be smaller and more efficient. With only one version of the software, this also makes it easier to test and support. New development methodologies like Agile are also popular with SaaS firms, who want to deliver functionality and correct defects quickly. Many firms are delivering new releases anywhere between once a month and once a quarter. This is in stark contrast to traditional software firms who are more likely to use a Waterfall development process; with product releases delivered every six to twelve months. Another philosophical difference for SaaS offerings is the concept of providing customers with a whole product solution. While it may not be possible to offer every capability that customer is looking for, what SaaS companies are doing is to provide additional plug and play capabilities from 3rd party partners. You can see this approach being used by’s and AppExchange or Intuit’s Marketplace for their partners. Other firms offer additional functionality by pre-integrating partner solutions for additional functionality like integration, security and even business intelligence. Something else that separates the two business models is that SaaS firms typically don’t allow customization of their products, but they do offer the ability to configure a wide variety of their product capabilities and functions. The advantage is that newly developed functionality that are can be shared with all customers or the feature can just be switched off. This ability to configure versus customizing the software saves SaaS customers the costs associated with upgrading and migrating to newer versions, and lowers their Total Cost of Ownership. SaaS firms have matured and can now deliver functional depth that is often equal to what is available from on-premise software. When these functionally rich products are combined with the flexibility to configure the software, with the SaaS provider managing the entire infrastructure, this delivers a very attractive whole product alternative to traditional on-premise software. 4
  5. 5. Challenges & Best Practices AssociatedSIIA Issue Brief with Transitioning to the SaaS Model Next Generation of Services With these configurable subscription products customers can now take more control over their own software administration. Now it is possible to add or move fields, change colors and logos, and turn on or off new pieces of functionality. For business users, these newer SaaS products feel a lot more like Facebook and eBay than like traditional transaction products or financial applications. Customers are also no longer interested in being buried in functionality. They like what they were experiencing with their consumer Internet experience, because simple is much better than complex. What they have discovered is that for most business processes, using a basic software package is usually good enough to get their job done, and many SaaS providers are delivering this, although others are providing even more advanced functionality than is currently available from traditional software companies. A trick that SMB SaaS providers discovered is that customers like to try software before they buy it. Most SMB SaaS firms now offer a 30-day trial of their products, where customers can get a basic instance of the software and actually use it. In many cases, these trial versions of software can be converted to paid versions after the customer has vetted the solution and feels comfortable with the functionality. This next generation of professional services is really intended to deliver the customer a rapid time-to-value experience. Once they sign up, instead of waiting for weeks for months to access their software, now they can get access in days, hours or even instantly. Usually this instant delivery of software is generic and may not be tailored to their specific needs, but the customer can start using it for training purposes or use it as a jump start that can help the SaaS vendor’s professional services team configure the personalized product. Customers like this new services model because the SaaS firms now own and manage the hosting environment, the infrastructure, security and this service comes as part of their monthly subscription fee. Most SaaS companies now provide a basic Service Level Agreement (SLA) that guarantees the infrastructure availability and uptime. This means that customers can save time and professional services fees associated with setting up and configuring their SaaS solution. SaaS Customer Acquisition The recession has changed the way customers buy software, and they are more interested in renting their software rather than making large purchases. Customers are looking to implement products in a phased approach and buy smaller pieces of functionality or individual modules, usually after they have tried the software. This new buyer behavior means that the SaaS customer acquisition processes have shifted to a land and expand strategy, start small and grow your customer product footprint incrementally over time. 5
  6. 6. Challenges & Best Practices AssociatedSIIA Issue Brief with Transitioning to the SaaS Model With the average transaction values being less than traditional software deals and the functionality being more basic SaaS firms have adopted a low touch sales model. This low touch approach is usually accomplished with a heavy dose of Internet marketing, self- service and tele-sales. This model requires a different type of sales rep and compensation plan, and sales processes are more geared for high volume, subscription transactions. SaaS transactions are based on subscriptions and recurring revenues, the cash flows associated with these types of deals are often different than perpetual license deals. Because of these differences SaaS sales managers are laser focused on, customer acquisition efficiency and keeping these costs as low as possible. They are using Internet marketing, channels, tele-sales, trials, and social networking to drive down the cost of securing new customers. These new customer acquisition techniques are being developed to deliver high quality, low cost or even free leads that are used to build up the company’s SaaS sales pipeline. Social tools like LinkedIn, Facebook and Twitter are even being used to build relationships with interested prospects, which often results in a qualified lead. These tactics are attractive because the cost of developing these types of leads is very low, but are like referrals and can be very high quality. SaaS companies have also figured out that building strong relationships with prospects isn’t the only way to build a solid sales pipeline. Developing an active customer community has many benefits including increased customer loyalty as well as creating opportunities for additional product sales. These types of communities build strong relationships and can aid in reducing customer churn and improving renewal rates, which are critically important for SaaS companies. A New Financial and Business Model Many ISV’s mistake SaaS as just a new type of software delivery model, when it is really a new and different business model. After looking at over 60 SaaS companies and comparing them to their traditional software companies, SaaS firms definitely have a different financial model, just look at their Profit and Loss Statements. For example, the COGS for a traditional software company would be 10-15% of revenues, leaving sizable Gross Margins of 85-90%. A representative SaaS company will have COGS at 25-40% of revenues, because they supply the hosting and infrastructure as part of their whole product package, which delivers smaller Gross Margins of only 60-75%. This is just one example why SaaS companies must operate much more efficiently if they want to turn a profit. Another difference is that the majority of SaaS firms get paid their revenues over time, which has a major impact on their cash flows, which requires very tight cost management, especially when you are first starting your business. This type of subscription business model requires a significant number of paying customers to reach break-even, so controlling expenses as well as efficiently growing revenues are two keys to building a profitable SaaS firm. Some firms also require multiple years paid up front to balance out cash flow differences between the two models. 6
  7. 7. Challenges & Best Practices AssociatedSIIA Issue Brief with Transitioning to the SaaS Model With the advent of technologies like Cloud Computing and Platform-as-a-Service, it is now possible to start a new SaaS firm with just a few employees and build a production product in months as instead in years. It is this focus on hyper-productivity that helps new SaaS companies not only get launched, but also helps them reach break-even as fast as possible. Using these types of technologies and new SaaS business practices, there are huge advantages that the traditional ISV’s never had when they were building their businesses. Another best practice for SaaS companies is to use as much SaaS technology to run their business as possible. Most SaaS firms will use for their CRM needs, Marketo for marketing, a product like NetSuite, Intuit’s QuickBooks Online, or Intacct for their financials and many other function-specific SaaS solutions to create their virtual front and back office. The other advantage of using these types of SaaS products is that you can just get the functionality that is needed and pay for it over time, which helps conserve capital. With this attention on financial and business efficiency, it shouldn’t be surprising to see SaaS companies paying very close attention to key performance indicators or SaaS metrics. Best-in-class SaaS companies are watching metrics such as MRR, Churn, Renewal Rates, CAC, Annual Contract Value (ACV), Revenue Per Unit (RPU) and a variety of other sales, marketing and operational indicators. For most SaaS start-ups their typical board meeting consists of running through their top 10-12 SaaS metrics, which provides a detailed look into how healthy their business is on a monthly and even weekly basis. These are also metrics that are being used by larger SaaS firms not only to manage their business but during fundraising and for public firms, information that is supplied to Wall Street analysts. SaaS Transition Best Practices For ISV’s making the transition to a subscription business model it is important to define what success actually means. Is it to completely transition to SaaS, operate a Hybrid business, sell into a new market segment or some other business objective? This type of strategic clarity is required when building a successful SaaS strategy and transition plan. It is recommended that before embarking on a SaaS transition process, ISV’s must develop a comprehensive strategic plan and financial model and benchmark against existing SaaS businesses wherever possible. This process will help to indentify key questions related to the transition including revenue and market share objectives, organizational structure, talent requirements, product attributes, development methodologies, and how to management overall customer relationships. The benefit of developing both of these documents is that costly mistakes can often be avoided, investment requirements and revenue objectives can be clearly detailed and most importantly, they can aid management in setting proper expectations with board members and investors. After completing these processes it is critical to build out an operational plan that walks through the quarterly objectives the company needs to hit related to key business dimensions such as development, sales, marketing, services, support and operations. This plan should be specific and outline key deliverables and milestones, along with the appropriate SaaS metrics. Management should carefully monitor their transition plans, progress against milestones, metrics and course correct where appropriate. This level of attention to your SaaS transition will help 7
  8. 8. Challenges & Best Practices AssociatedSIIA Issue Brief with Transitioning to the SaaS Model to eliminate the big mistakes, control costs and highlight when it might be time to step on the gas and make additional investments to scale your business. As part of a solid transition-operating plan, you need to pressure test your business assumptions along the way and carefully evaluate your SaaS metrics to see what is working and what needs to be adjusted. For example, testing messaging, marketing campaigns, pricing, packages, customer satisfaction levels and other elements of a new SaaS business are appropriate areas to be tested on an on-going business. The best SaaS companies are constantly testing multiple elements of their businesses every week. Get Your Own SaaS DNA One of the best ways to speed a SaaS transformation and increase its chances for success is to hire experienced leaders and key contributors. By hiring employees who have lived inside of a SaaS business, to compliment market and product experts from the on-premise world you can avoid making a myriad of small mistakes that most employees experience during their first tour of duty at a SaaS firm. These experienced employees can hit the ground running when it comes to their specific SaaS business area and can increase the chances for success by avoiding typical pitfalls, and this will save you time and money. Another way to build up your organization’s SaaS DNA is to leverage experienced consultants and technology partners to jump-start your SaaS transition initiatives. It may take a while to hire SaaS staff, so selectively using consultants can help your existing team to come up the SaaS learning curve more quickly, and assist in setting up new business processes can be valuable. Many firms will also leverage firms with specific Cloud Computing or technology offerings to help to build out their new SaaS business. These technology partners can provide hosting infrastructure, integration or security software or even support and content to assist in developing your whole product SaaS offering. As was recommended earlier, SaaS companies should attempt to use 100% SaaS technology to run their business. By using another SaaS solution, employees and executives can become more familiar with SaaS practices and the overall value proposition. Offer Scalable and Flexible Software Services Facebook, eBay and have influenced today’s business software buyer, they are now looking for easy-to-use, fully featured and reliable solutions from their SaaS providers. This is why it is necessary to provide solutions that are built on a solid Internet technology foundation that deliver frequent updates but can also be operated profitability. Best-in-class SaaS firms are embracing the Agile development model and building on top of a true multi-tenant architecture. The benefits of the Agile approach for SaaS providers is that they can do frequent releases of software that add important features and can patch defects quickly. Then by using a multi-tenant platform, SaaS firms can keep the cost of creating new instances of their software for customers very low, which improves their ability to scale profitably. 8
  9. 9. Challenges & Best Practices AssociatedSIIA Issue Brief with Transitioning to the SaaS Model Offering SaaS solutions that provide buyers with quick and easy ways to use their products that demonstrate rapid time-to-value, that is why leading firms are offering software trials and fast start packages. These low touch or self-service approaches require little or no human intervention but provide a lot of value to the customer. By using wizards and configuration engines, it is possible to on-board new customers very quickly, and SaaS providers are giving customer what they want. This services approach to lowering the overall cost and time associated with setting up SaaS products, is a real win-win for all everyone. Consumption and adoption are new terms that are used by SaaS companies to describe how customers are actively using their software, and deriving value from their subscription. If customers are really satisfied with a SaaS product, they tell their co-workers who will want to use it because it makes their job easier; then they are more likely to renew their annual subscription and buy more products and services. Another term that is often used is viral, if software is really easy-to-use, like Facebook, and users find it useful, usage can spread quickly which is the ultimate consumption and adoption objective. Just look at how this approach has been used to launch Yammer successfully into the market. For experienced consumers of SaaS products, offering a solid SLA details availability but and scalability of the provider’s data center. An SLA is a guarantee of a SaaS product’s uptime, security levels and how they will respond in case of a catastrophic outage. SaaS providers not only deliver the software but also all of the underlying infrastructure, and the customer is product experience that is at least equal to, or better than, hosting the software inside of their own data center. Companies like have even taken the SLA to new levels by offering a website where customers and prospects can see the actual performance of their systems and if there are any outages. This level of transparency is increasingly important for the growing number of experienced SaaS buyers. Enforce the Customer Golden Rule Successful SaaS firms understand that they have to offer an outstanding customer experience. They also understand there is a higher likelihood of continued annual subscription renewals, product adoption and consumption as well as tighter relationships when their customers are satisfied with their service. Another customer satisfaction best practice is to develop a vibrant customer community that has an executive who acts as the internal customer champion, and some firms have gone as far as to hire a Chief Customer Officer to be the voice of the customer inside of their company. By having this executive-level customer advocate, this person can keep the company focused on satisfying the customers, building a community and encouraging participation. It is also a good idea to keep your customer community private and separate from any type of selling activity because it will undermine your ability to establish credibility and trust with your customers. 9
  10. 10. Challenges & Best Practices AssociatedSIIA Issue Brief with Transitioning to the SaaS Model Building a Strong Sales and Marketing Engine For all software companies, having a strong sales organization is vital to the overall success of the company. This is also true when transitioning to SaaS. It just requires building a different type of organization, one that can be optimized for the land and expand sales approach. When customers are successful with their first SaaS product and renews there will be opportunities to up-sell – sell more capacity or seats of the original product, and cross-sell – provide additional, complimentary products or services. This strategy requires separating new account sales reps, sometimes referred to as Hunters, from your existing account managers, your Farmers. With these two roles separated within your sales organization, detailed rules of engagement and comp plans, it is possible to get the most leverage out of your SaaS sales teams. When building out your SaaS sales team, make sure that your existing sales reps are being fully utilized. In traditional software sales roles, industry research has shown that most reps only spend about 10% of their time actually selling. With the SaaS sales model, the percentage of actual selling time needs be closer to 50%. This higher level of utilization is accomplished by generating a much higher level of qualified opportunities, which can be force feed to the sales team. One benefit of a highly utilized sales team is that fewer Quota Bearing Sales Reps (QSBR) are required, and with this smaller group they have a higher probability of hitting their quota targets. In the aggregate, it also costs less to fund additional lead generation programs, and a few extra telemarketing reps than hiring more expensive sales reps. This larger lead pool is generated by conducting a continual series of lead generation campaigns – email blasts, webinars, Tweeting, blogging, communities and other tactics to fill up each sales reps pipeline with qualified opportunities. For account managers who are focused on existing customers, they may take a different approach but will still be required to operate at much higher transaction rate than their traditional software counterparts. SaaS management is continually monitoring sales and marketing costs as well as the effectiveness of these investments. That is what the Customer Acquisition Cost or CAC SaaS ratio is intended to measure that effectiveness and payback period of sales and marketing investments on a monthly or quarterly basis. By watching this metric, it is possible to determine if your sales and marketing efforts are not working and need to be adjusted or if they are working, that would indicate it is time to provide additional investment to increase revenues. We would recommend taking a phased approach to building out a SaaS sales team and following the Sales Marketing Curve methodology, which is what most best-in-class SaaS firms use as a guideline. 10
  11. 11. Challenges & Best Practices AssociatedSIIA Issue Brief with Transitioning to the SaaS Model Conclusion Transitioning to a new subscription software business model is easier said, than done. This paper has outlined many of the considerations and best practices associated with making this transition to SaaS. Keep in mind that for most companies a SaaS transition can take anywhere from 3-5 years to complete and take up to 5 years to break-even so it is reasonable to expect investments in support of your shift from a perpetual model to a subscription model. Now no matter where your firm falls along the Software Continuum – whether you are a Hybrid that will always offer an on-premise delivery model and set of products or you want to make the full transition to SaaS, you now have some concepts to consider as part of developing strategy and operating plans. • Build a new SaaS culture – Find experienced leaders and staff that can bring their expertise to help your organization succeed at SaaS • Develop new subscription-based products – Don’t try and recreate your traditional on-premise products, think in terms of delivering a whole product solution that is as easy-to-use as Facebook and is built on top of a multi-tenant foundation • Deliver rapid time-to-value services – Make sure your next generation services offer more do-it-yourself features, leverage configurability and available quickly • Focus on efficient customer acquisition – Use a measureable, land and expand methodology to lower costs, build a team with both Hunters and Farmers and be prepared for a high transaction volume sale environment • SaaS is a different business model – Different financials, cash flow, business processes and metrics that need to monitored carefully As the Software market moves towards a future that is based on subscription software, managing through this type of complex transition is becoming a business imperative. The good news is that there are a growing number of firms that have successfully transitioned, or are in the process of transitioning, their model to SaaS including Concur, Ariba, Ultimate Software, Sabrix, Plateau and others. The objective is to build your strategy and financial model in a way that will get you to where you need to be and then start executing one quarter at a time and you can get there. 11
  12. 12. SIIA Issue Brief Additional Resources Resources White Papers “Customer Bill Of Rights: Software-as-a-Service”, Altimeter “Migrating to a SaaS Model: A Roadmap to Success”, THINKstrategies “The 7 Secrets of SaaS Startup Success”, “Beyond the Platform: Choosing the Right SaaS Delivery Partner”, Stratecast Webinars Montclair Advisors and OpSource, April 2010 Making SaaS Strategies Work for Your Businesss SIIA & Blank Rome LLP, June 2010 SLA Webinar: Setting Expectations in SaaS SIIA & NetSuite, May 2010 How to Survive and Thrive in the New Software Industry Blog Posts SmartSaaS blog, by Montclair Advisors, LLC, “12 SaaS Transition Tips” series July 26, 2010, Tip #1: Software Continuum August 3, 2010, Tip #2: Separate Hunters from Farmers August 10, 2010, Tip #3:Test Everything August 23, 2010, Tip #4: Sales & Marketing on a Budget ZDNet, by Phil Wainewright, “Four pillars of the transition to SaaS” Multimedia Interview by Phil Wainewright: Mike Seckler, Apprenda “What it Takes to be a SaaS Provider” SIIA “All About the Cloud 2010” Keynote Maynard Webb, Chairman & CEO, LiveOps SIIA “OnDemand Europe 2009” Keynote Panel How Cloud Platforms Change the Game for ISVs 12