Going Hybrid with SaaS, Managing Perpetual and Subscription Businesses in the same Chassis

1. Going Hybrid with SaaS:
Managing Perpetual and Subscription
Businesses In the Same Chassis
an IDC Breakfast Briefing
Amy Konary Robert Mahowald
Director, Worldwide Software Director, Worldwide
Pricing & Licensing Research Software-As-A-Service
June 2009 Program (SaaS) Research Program
IDC IDC
Copyright 2008 IDC. Reproduction is forbidden unless authorized. All rights reserved.

2. Agenda
Market Landscape
What do Customers Want?
Why go Hybrid?
Best Practices for Hybrids
IDC Recommendations
© 2008 IDC 6/18/2009

3. IDC IT Spending Expectations
WW IT Spending
7.3%
7.1%
5.8%
US 5.6%
Worldwide
4.2% 4.3%
2.3% 3.2%
2.7%
1.6%
2007 2008 2009 2010 2011 2012
-1.5%
Source: IDC Q1 2009 Worldwide Black Book
Copyright 2008 IDC. Reproduction is forbidden unless authorized. All rights reserved. 3

4. Visceral Reactions- Vendors
Renegotiating existing contracts with partners
• OEM, ISV Royalty
• Where are the negotiation points?
Looking for ways to gain competitive advantage
• Project Liberate
• 3rd-Party Maintenance Firms
Reducing prices
• Big discounts on license
• Concessions on maintenance
• Canceling or delaying scheduled price increases
Looking to improve licensing operations
• Technology
Launching or refining new business strategies
• Subscription/term licensing
• Software as a Service (SaaS)
• Open Source
© 2008 IDC 6/18/2009

5. Most Attractive Features of
Software Pricing Model Today
1. Models that help reduce the burden on capital
budgets by shifting software spend to OPEX
2. Models that distribute costs evenly over time
3. Models that tie pricing to usage, like a utility
Source: IDC Survey of Software Pricing, April 2009, n=185
© 2008 IDC 6/18/2009

6. Customers Seizing the Opportunity
Q: Now is a good time to negotiate deep discounts on software - % Strongly Agree
1,000+ employees
Company 100 to 999 employees
Size
<100 employees
Manager
Title VP or Director
C-Level
IT
Type LOB
Total
0 20 40 60 80 100
% Agree
Source: IDC Survey of Software Pricing, April 2009, n=185
© 2008 IDC 6/18/2009

7. Will All of This Normalize Pricing?
What is Normal?
• High, up-front license costs
followed by a large, ongoing
maintenance fee
• Customers that feel bullied into
buying via aggressive sales
techniques
• A software value disconnect
© 2008 IDC 6/18/2009

8. Will All of This Normalize Pricing?
What is Normal?
• High, up-front license costs
followed by a large, ongoing
maintenance fee
• Customers that feel bullied into
buying via aggressive sales
techniques
• A software value disconnect
Why Be
Normal?
© 2008 IDC 6/18/2009

9. Software Industry Landscape
Software as
a Service
Service
DELIVERY APPROACH
These approaches
can be mutually
88% of WW exclusive!
software
revenue in
Product 2009
LICENSING APPROACH
Perpetual Subscription
© 2008 IDC 6/18/2009

10. Subscription is Here
Of the top 100 software vendors worldwide by revenue,
40% report subscription revenues
For 13% of the top 100, subscription represents greater
than 50% of total software revenues
Salesforce.com is the only pure-play SaaS provider to make
it into the top 10 vendors according to software
subscription revenue
Projected growth in SaaS impacts the subscription
forecast, with SaaS-revenues making up 32% of the overall
subscription forecast in 2008 and 33% in 2009.
2009 Spending on SaaS (est $9.5B WW) is YoY growth of
42% vs. All software: (3.4%) vs. All Applications (5.6%)
© 2008 IDC 6/18/2009

11. Commitment to SaaS, 2008-2010
Level of Commitment to SaaS Applications as a Percent
of Overall Applications Use, 2008-2010
88% of US organizations using SaaS will grow
or maintain their level of SaaS services
76% of US organizations use at
least 1 SaaS service; 80% of US
organizations < 500 employees
use at least 1 SaaS service
45% identified at least one
application or process which would
be migrated from an existing on-
premise application to a SaaS
service
74% will source at least 25% of all
applications via SaaS
Source: IDC SaaS Adoption Survey, November 2008. n= 200 US-based IT Director and above, and 200 LOB Director and above. 11
© 2008 IDC 6/18/2009

12. What’s Different About SaaS?
For providers, this means…
Offsite, provided by third-party provider -
“In the cloud” execution, which for most SLA rests with ISV or designee
practical purposes means offsite, location-
agnostic
Accessed via the Internet - standards-based, N-scale service
universal network access
Minimal/no IT skills to “implement” - online,
simplified specification of services and no Real-time; run by non-techies
lengthy implementation of on-premise systems
Automated Provisioning - self-service
requesting, near real-time deployment, Highly transactional; Dynamic
dynamic & fine-grained scaling scaling and flexing of capacity
Fine-grained Pricing - usage-based pricing
capability though some providers mask this Priced based on delivering
granularity with long-term, fixed price ongoing “shared value”
agreements
Shared resources/common versions –
Configure vs. customize, with integrations and
Single code base, multi-tenant
client-side optimization architecture
© 2008 IDC 6/18/2009 12

13. Why Go Hybrid?
• Buyers want choice: 74% of IT
Customers respondents (85% of LoB ) said
• Addresses needs today: TTV SaaS provided important new
• Provides new sourcing options from sourcing and pricing options
trusted vendor
• Change their IT posture (cost
center to service center, situation
SaaS to transformational…
Vendors
• Competitive push
• Customer pull
• New market opportunity (72% said
they would look to an existing vendor first when
sourcing a new application) • Buyers want guidance:
• Growth within existing customers Alternative sourcing vs.
transformational (10% vs. 100%)
• GROWING PAINS
© 2008 IDC 6/18/2009

14. Small ISVs Have a Fighting Chance
with Hybrid
Q: My organization is open to buying from a small firm with a very short track record, if the price is good
and functionality seems at least comparable- %Agree
1,000+ employees
Company
100 to 999 employees
Size
Under 100 employees
Manager
Title VP or Director
C-Level
IT
Type LOB
Total
0 20 40 60 80 100
• Customers willing to take a risk provided there are savings built-in…
• Approximately 65% of net new applications offerings WW in 2008 were subscription-
based SaaS offerings (whether hybrid or pure SaaS)
• If priced and marketed correctly, very small ISVs can look larger than they are…
Source: IDC Survey of Software Pricing, April 2009, n=185
© 2008 IDC 6/18/2009

15. What Are Key Vendors Doing?
“We care about scale and
subscribers” Low cost for
entry, but we’d like you to
PaaS and Cloud-
“We have established stay awhile…”
Scale Providers
brand, customers, and
channels… Are these assets SalesForce
or liabilities?” Amazon
Google
SaaS Providers
Workday
Taleo
Traditional ISVs Concur
EMC/Mozy RightNow
HP
Symantec
Adobe “We don’t have legacy
Sungard perpetual license issues, and
IBM we understand we might hit a
ceiling as we scale from SMB
Microsoft
and mid-market into enterprise
SaS – what’s the right model?”
© 2008 IDC 6/18/2009 15

16. Hybrid: A Bipolar Business Culture
“Our perpetual business is driven by elephant
hunter DNA: hunt the biggest animals, figure out
what to do later.”
“In our subscription business, we start small and
expand over time. We are focused on making
sure we live up to our commitments because if
we don’t, we’ll never get the renewal business.”
Source: Interview of software publisher on managing hybrid perpetual, subscription businesses, 2009
© 2008 IDC 6/18/2009

17. Building A Hybrid Business: Selling
Sales Approach is “Always Be Selling”
“Software” means large up front investment in both license and hardware
Requires consultative and solution-selling approach, not IT-centric
SaaS is fee/consumption-based, no hardware, and requires accelerated sales
techniques
– Lower hurdle to acquire customers, greater emphasis on customer retention,
upsell, cross-sell
Ordering and billing infrastructure
“Software” ordering, provisioning and billing process is not automated
– Means long sales cycle; one-time, up-front billing
SaaS ordering, provisioning and billing process done in real-time
– Customers want to evaluate, purchase & provision online or telephone sale
Sales compensation
SaaS is low price-point, high volume. Typically sales execs paid for up-front
license revenue, not recurring annuity stream: the SaaS job is not over when the
contract is signed…
© 2008 IDC 6/18/2009

18. Building A Hybrid Business: Merchandizing
• Predictability – yours and theirs. You want a consistent COGS and
recurring revenue, and they want cost smoothing over time.
• Set-up Fees - How much will implementation slow down the sales
process? What is reasonable and how does this influence the monthly
recurring prices? Goal: remove barriers to quickly get customer to VALUE
• Minimums – Several SaaS vendors employ a usage-based pricing similar
to usage tiers on cell phone plans -- in these cases the vendors choose to
decrease implementation fees in order to get higher minimums
• Contract Length – Our survey data point to an expectation that
price/user or cost for add-ons will be lowered or at least more negotiable
with a longer-term commitment: 3 years is the norm to secure that break
• Differential price – An advantage of established vendors with mature
brands, not value-based or cost-plus: eg. Microsoft Exchange vs. BPOS
© 2008 IDC 6/18/2009

19. Building A Hybrid Business: Pricing
Do Do Not
• Keep it simple & start small • Bracket by customer size
•Take a portfolio approach • Create a “lite” product for
SaaS/subscription
• 3-4 year break-even •Assume your hunters will sell
• Combine RTU, maintenance, (and SaaS/subscription
hosting) in one price • Over-protect against
• Set sales compensation to neutral cannibalization
• Offer annual contract, with
discounts for longer terms
• Consider the channel impact
© 2008 IDC 6/18/2009

20. Building A Hybrid Business
Other Considerations
• Separate business or not? How important is brand?
• Channels: Traditional reseller can get a 30% cut, but you might
only need 10-25. Online affiliates get 10-30%, but you may need
1,000+…
• New marketing organization? Marketing for new SaaS initiative
is typically highest cost – 50-65% of COGS
• Separate sales? Revenue recognition? Can software sales reps
learn to “always be selling”?
• Common engineering core? Share this with traditional R&D?
• Support: who will fulfill the SLA in a real-time business?
© 2008 IDC 6/18/2009

21. What’s Next and Essential Guidance
• SaaS is not a fleeting trend, and it’s important to build a hybrid
company: Vendors cannot safely orient themselves around a perpetual
model any longer, and expect to gain share (no matter what the
economic climate)
• Reorganize your company’s culture into a hunter/gatherer approach or
a dual/hybrid distribution and selling model
• Engage with customers and be open to change
© 2008 IDC 6/18/2009

22. Robert Mahowald 5 Speen Street Amy Konary 5 Speen Street
Director, Worldwide Framingham, MA 01701 Director, Worldwide Software Framingham, MA 01701
Software-As-A-Service Pricing & Licensing
Office: 1-508-988-6701 Research Office: 1-508-935-4055
(SaaS) Research Program
rmahowald@idc.com IDC akonary@idc.com
IDC
Twitter: SaaSpro Twitter: Akonary
www.idc.com www.idc.com
22
© 2008 IDC 6/18/2009