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.

1. SIIA ISSUE BRIEF
Challenges & Best
Practices Associated
with 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. Challenges & Best Practices Associated
SIIA 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
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3. Challenges & Best Practices Associated
SIIA 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.
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4. Challenges & Best Practices Associated
SIIA 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 Mint.com. 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 Salesforce.com’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.
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5. Challenges & Best Practices Associated
SIIA 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.
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6. Challenges & Best Practices Associated
SIIA 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.
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7. Challenges & Best Practices Associated
SIIA 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 Salesforce.com 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
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8. Challenges & Best Practices Associated
SIIA Issue Brief
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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 Mint.com 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.
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9. Challenges & Best Practices Associated
SIIA 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 Salesforce.com have even taken the SLA
to new levels by offering a website trust.salesforce.com 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.
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10. Challenges & Best Practices Associated
SIIA Issue Brief
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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.
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11. Challenges & Best Practices Associated
SIIA Issue Brief
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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.
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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”, Salesforce.com
“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
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