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Navigating the Top Six Business Challenges of Delivering Software as a Service


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Navigating the Top Six Business Challenges of Delivering Software as a Service

  1. 1. Navigating the Top Six Business Challenges of Delivering Software as a Service whiTEpApEr Executive Summary For Enterprise organizations, utilization of software as a service (SaaS) applications means Sixty-five percent or more of all easier budgeting, faster deployment, and reduced risk. For cloud service providers and new business applications in the established on-premise software publishers, SaaS presents a new opportunity to give enterprise will be cloud-based customers what they want—while ensuring recurring revenue streams and exploring new or hybrid by 2015 (up from 15-20 markets. According to industry analyst firm, Saugatuck Technology, 65 percent or more of allpercent in 2009). And all customer new business application/solution decisions in the enterprise will be cloud-based or hybrid by segments will be impacted. 2015 (up from 15-20 percent in 2009). And all customer segments will be impacted.1 Saugatuck Technology, The future of software delivery is clear. It’s the path to software monetization in the cloud that January 2011 becomes foggy for both cloud service providers and established software publishers. While delivering software as a service opens many doors for software vendors, it also presents a new set of challenges. This paper explores the top six challenges software publishers are faced with, and presents a quick and easy way for SaaS providers to define their service catalogs, Thirty percent of enterprise provision and control user access at the feature level, measure service usage for billing and spending on new software business intelligence purposes, and instantly adapt their service catalog to embrace new and in 2010 was for cloud-based evolving market opportunities. technology. And by 2014, 50% of the IT budget for new software Accelerating Towards the Cloud will be for cloud-based solutions The software industry is accelerating towards the cloud. According to Saugatuck Technology, 30 percent of enterprise spending on new software in 2010 was for cloud-based technology. Saugatuck Technology, And by 2014, they predict that 50 percent of the IT budget for new software will be for cloud- January 2011 based solutions.2 70% 60% 50% 40% 30% 20% 10% 0% 2010 2012 2014 Percentage of New Software Expected to be Cloud-based Source: Saugatuck Technology Inc., Cloud Infrastructure Survey (Fall 2009), Global N=670 Percentage of New Software Expected to be On-premise Navigating the Top Six Business Challenges of Delivering Software as a Service Whitepaper 1
  2. 2. This technology is playing out not only for the early-adopting SaaS players with ERP, CRM, and customer support solutions, but also has expanded to include the more traditional workflow- based solutions, including HR, finance, and collaborative design. The cloud movement seems to be affecting us all. This paper is a reflection of SafeNet’s experience and take on the top challenges software vendors face when considering a move to the cloud, as well as how the cloud is changing (or not changing) how vendors are monetizing their software solutions. The Top Six Cloud Challenges The cloud is not only changing the way we in which we build our software offerings, it also has an impact on how we do business and interact with our customers. Over the past two years SafeNet has been studying how software vendors can monetize (i.e., sell, do business, interact with customers) most effectively in the cloud. Our research included data from top industry analysts, vendors with a long history of successful services in the cloud, vendors currently in the process of offering services, and existing software vendors that are currently selling installed on-premise solutions and are just now building their cloud strategies. We have distilled our research findings down to the six core challenges independent software vendors (ISVs) face when attempting to monetize solutions in the cloud: 1. Costly to enforce contract compliance 2. Limited feature bundling 3. Costly to repackage 4. restrictive and very basic subscription business models 5. Manual and complex usage tracking and reporting 6. Fragmented operational processes for delivering both installed on-premise and cloud offeringss Service Agreement Compliance It is easy to understand how enforcing contract compliance can help you squeeze every dollar Interestingly enough, what we out of legitimate users. Interestingly enough, what we discovered is that a majority of cloud discovered is that a majority of service providers are still using paper contracts. The belief is that getting to market quickly is cloud service providers are still the most important factor and starting with paper contracts to get the initial set of customers using paper contracts. won’t have a negative long term impact. They feel that their target customer base wouldn’t intentionally overuse and that enforcement technology can be rolled out simply in a future Up to 60% of ISVs do not have version of the service. systems in place to accuratelyassess how customers are using Unfortunately, those that choose this path, underestimate the negative impact associated with their software. allowing a customer to be ‘out of compliance.’ Let’s explore this with an example that we have heard time and time again from our clients: Sandhill Group Web Site, October 2010 “We are a mature SaaS company that has been serving the industry for over ten years. Our services are sold into large enterprise technology companies. When we launched, we figured that because we were targeting household-name technology companies, that we would have no problems with maintaining compliance with the contract terms through just a standard paper license. Well, a year and a half went by and we noticed that even though we were successful on-boarding new customers, not a single customer came back to renew or to increase the limits on what they purchased. This led us to perform an audit. What we discovered shocked us. Not a single customer was in compliance with their service agreement terms. How could this be? Even the largest, most well-known customers were consuming more service than what they had purchased!” Navigating the Top Six Business Challenges of Delivering Software as a Service Whitepaper 2
  3. 3. They had identified that their customers were outside the boundaries of their contracts, and thereal cost of having to bring customers back into compliance revealed itself. This is a relationshipcost that starts from first having to explain to a customer how they were able to get out ofcompliance in the first place. It was astonishing to these paying customers that they couldunintentionally become out of compliance. New terms were renegotiated and the customer’spurchaser had to explain to management why, during the next budget cycle, the budget for thesoftware needed to be increased even though they would be using the same level of service asthe year priorWith the luxury of hindsight, we can understand how having the proper controls in place, allowingour customers the transparency in their contract terms, and providing a smooth easy upgradepath to increase limits (and functionality) eliminates this costly customer predicament.product VersatilityPackaging is an art improved over time, based upon competitive offerings, evolving technology,emerging problems, customer preferences, and targeting new markets. All of these thingsinfluence how to best package or bundle our products to maximize the applicability of ouroffering.It’s clear that the SaaS market is still emerging, and so far there is minimal diversity in the way inwhich various service offerings can be consumed. SafeNet has recognized this same trend withinstalled applications over the years. During the early stages of installed on-premise software’srise, most software was offered with limited functionality. As the market grew year after year,packaging versatility played a key role in positioning and maximizing a software vendor’sbusiness.How do we reach the right product versatility? Product Segmentation Which features Optimized Market do I monetize? Product Applicability Packaging The right offering for How do I deliver every customer those features?Business AgilityVersatility is only half the battle. If you are unable to rapidly respond to ever-changing marketdemands, you create an opportunity for your competition to catch up with you. Being able toadapt your service catalog in real time significantly reduces your time to market and R&D costs.Decoupling engineering from your business decisions is one of the smartest moves you canmake. Involving R&D when making repackaging changes is a real momentum killer. Ideally, whatyou should aim to accomplish is to be able to make business decisions regarding packaging,licensing terms, and pricing without ever having to involve engineering. Involving R&D at thesestages defocuses your precious limited resources from their core responsibilities.One of the most successful SaaS players to date (a service that nearly everyone has used)highlighted the problem for us perfectly. To introduce new packages to the market took themnine months. They were not introducing new features, not releasing new innovation, just a newpackage of existing features. Nine months of precious development time just to sell the sameproduct in a different way.Navigating the Top Six Business Challenges of Delivering Software as a Service Whitepaper 3
  4. 4. Sophisticated License Models Up to this point, we have been talking about product packaging—what a customer can consume. Now we will switch gears and move to another important topic—how they consume. As your target markets mature, the way that customers want to consume your offering will diversify. We have seen this truth play out in the on-premise market time and time again. The same trends are happening with SaaS as it continues to mature. You want to allow your customers to budget for and consume your service in the best way possible for their business. Some of the main factors that influence consumption preferences are market segmentation, customer size, and how critical the offering is to their business. To highlight an example of customer size, a recent CoFluent Design news release detailed a new way to do business. CoFluent is a leading electronic simulation-level company providing system-level auditing and simulation for embedded devices. They have a very high-value asset in their design software, and they are very successful at the high end of the market. They adopted a pay-per-use model for their design software to address the need for a lower price point. This lower end of the market only requires the software to do one or two designs a year but couldn’t afford the high price tag for their subscription. As CoFluent’s market matured, they needed to find new ways to offer, not repackage their features, and sell to a different segment of customers. Business intelligence The cloud delivery model for software offers vendors the ability to much more easily track customer usage. Unfortunately, the majority of service providers are only collecting and using this information for billing. This approach leaves valuable strategic information on the table that can be used to improve your offering. Recent research shows that up to 60 percent of ISVs do not have systems in place to accurately assess how customers are using their software.2 One of the most basic day-to-day influences product managers have on their product line is in prioritization of their product’s user stories for the development team. Having the right tools in place allows product managers to easily understand what the most popular features are and where to direct their investment. If there are areas that are of very little use to customers, you shouldn’t continue to invest your R&D and Q&A cycles in these areas with every release. Business intelligence can also lead to making better packaging decisions. Understanding who is using what can highlight which features to monetize separately. Maybe there is a low-interest feature that you could package in a different way to accelerate demand. As important as business intelligence is to making the right technology decisions, becoming more intimate with what your customers are doing makes you a better technology partner. We all want to realize a partnership with our customers and not just drop off software and hope they figure it out. One of the most common ways this business intelligence can help is by bringing potential Augmenting your on-premise deployment issues to light. If you sold 1,000 seats and, after three months, you get a reportportfolio with a cloud service should showing that only ten seats are activated, this can be an early warning sign of a deployment not double your cost or increase issue. It could be a customer training issue or perhaps a professional services integration issue. your operational workload. Whatever the root cause, having the insight upfront to proactively reach out to your customers allows you to realize the promise of becoming a technology partner and not just another vendor. Back Office Support If you have been involved in establishing the business process for licensing, from contract creation to delivery to activation tracking, and then upgrades, you know that it requires a high level of sophistication and work to have a smooth running system. Having the right systems and the right training of your internal and external (customers, distributors, partners) users is critical to the success of the business process. Augmenting your on-premise portfolio with a cloud service should not double your cost or increase your operational workload. If you are going to be offering both on-premise and cloud-based solutions, it doesn’t make sense to have two separate Navigating the Top Six Business Challenges of Delivering Software as a Service Whitepaper 4
  5. 5. systems in place to handle the different types of business. We can examine the impact in twoways—from the internal vendor perspective and from the perspective of the external users.As a vendor, you need a single way to manage multiple business lines. You don’t want to fall intothe trap of having two separate systems to create and manage contracts. Because you would belosing a lot of efficiency along the way, not to mention that different systems would drive up ITcosts, hardware costs, software costs of the managing systems themselves, training costs, andoverall complexity.Let’s not only focus on the disruption of two disparate systems on your internal users, but let’salso be cognizant of the effect on your customer. One of the most overlooked aspects of a goodlicense management system still tends to be its effect on the end user. As your customer, I wantto, at any time, be able to access detail of my assets. I want to know what I have purchased. Iwant to be able to map my costs to the value I am getting (e.g., I have 20 users and those userslogged so many hours). I want to be able to know how I could upgrade my plan to take advantageof new features or maybe other product lines you offer. And, most importantly, I want the variousproduct lines that I purchase from you to be consolidated and understandable in a unified way. Idon’t want to have to view my entitlements from three or four different systems.Growing pains – A Natural progressionThe following is very common scenario in the software product lifecycle. And because the samethings hold true for SaaS business lines, we’ve included it in hopes that it will help you plan forthe road ahead.As a software provider, when entering a new business line into the market, it is common to takea relatively simple application with a very small and manageable number of features and offerit at a flat rate. And as typical with an introductory offering, because of the limited numberof features, you aim to capture a very targeted segment of the market. As customer adoptionincreases, you will go through the traditional market saturation cycle with your customers.You will start on-boarding customers of different types and from different industry segments.This will push you to grow your offering in varying directions; different features that are onlyapplicable to certain market segments. As this continues, you will be faced with variouschallenges.The first challenge will be to build a plan to monetize all this additional investment. Yourcustomers will expect that the increased R&D investment should be covered under their lowflat-rate subscription. As a software vendor, you have the foresight to know that if you’re not ableto monetize your continued R&D investment, you are in a losing financial proposition.The second common challenge is in knowing how to package this larger set of features to morespecifically target each customer segment. This step then leads you to realize that a subset ofthese features are high value and/or potentially very costly to maintain. Therefore, you need toknow how to monetize these features with a model that more directly ties the value of use toeach specific feature.As your success grows, you bring more offerings to market and build a larger and larger customerbase. How will you manage the ever growing product/service catalog? How will you automatecontract creation, delivery, activation, and asset detailing for all those customers? How will youincent upgrades and continued growth of your existing customer base through promotionalplans and packages targeted to specific segments of the market? How will you manage acrossbusiness lines? How will you manage across licensing technology? How will you manage multipledelivery models (SaaS and on-premise) for your entire product portfolio?This natural progression has played itself out in the on-premise space time and time again. Andour research and experience tells us this same cycle holds true for SaaS applications.Navigating the Top Six Business Challenges of Delivering Software as a Service Whitepaper 5
  6. 6. SummaryAs early adopters of SaaS have realized, it is not easy to find the right catalog segmentation,feature bundling, and pricing models. It takes time, experimentation, and, most importantly,service catalog flexibility. As with traditional software consumption, ensuring user compliancewith the terms of a service agreement is critical to profitability. Before SaaS, data collection wasa premium feature of most software licensing and entitlement management systems, used toforecast trends and make informed business decisions. In the cloud, usage data is not only usedfor business intelligence but is vital for supporting business-critical processes, such as billing.Therefore, it is essential that cloud service providers are able to easily track, organize, andreport on service usage.While cloud service providers are running into many of the same challenges faced by ISVs indelivering on-premise software several decades ago, the benefits of cloud service deliveryfar outweigh the potential growing pains. The good news is that you don’t have to go it alone.SafeNet is a partner that has been serving these markets and solving these challenges for over25 years.SafeNet Sentinel®Cloud ServicesSentinel Cloud Services make it quick and easy for SaaS providers to define their servicecatalogs, provision and control user access at the feature level, measure service usage for billingand business intelligence purposes, and instantly adapt their service catalog to embrace newand evolving market opportunities. DEFINE DEFINE A versitile service catalog for maximum market penetration ADAPT PROVISION PROVISION Contracts & automate business processes to maximize efficiency CONTROL Service authorization to ensure service agreement compliance MEASURE Service usage for billing support & instant business insight ADAPT Service offering on-the-fly to embrace new & evolving markets MEASURE CONTROLAbout Sentinel Software Monetization SolutionsSafeNet has more than 25 years of experience in software protection, licensing and entitlementmanagement, enabling software monetization of applications delivered on-premise, embeddedwithin a piece of hardware, or hosted as a service in the cloud. The Sentinel product portfolioincludes: Sentinel HASP, Sentinel RMS, Sentinel EMS, and Sentinel Cloud Services.Bibliography1, 2 Saugatuck Technology, Key SaaS, PaaS, and IaaS Trends Through 2015: BusinessTransformation via the Cloud, January 2011 Sandhill Group, Software Pricing and Licensing Trends -2010 the Top Six Business Challenges of Delivering Software as a Service Whitepaper 6
  7. 7. Join the ≥ Sentinel Online ≥ Twitter ≥ LinkedIn ≥ YouTube ≥ LicensingLive ≥ BrightTalk ≥ Retweet this Document Contact Us: For all office locations and contact information, please visit Follow Us: ©2011 SafeNet, Inc. All rights reserved. SafeNet and SafeNet logo are registered trademarks of SafeNet. All other product names are trademarks of their respective owners. WP (EN)-08.10.10 Navigating the Top Six Business Challenges of Delivering Software as a Service Whitepaper 7