SaaS for the Enterprise: Moving from Traditional (On-Premise) Software
By
Jeff Saling
Gartner presented research at the SaaS University conference in Washington, D.C. in July. Its research showed positive statistical evidence that all but a limited set of verticals plan to expand with SaaS rather than on-premise offerings. The most eye-catching statistics were that SaaS revenues as a whole are expected to grow by 15 percent (compounded) over the next 5 years, while traditional on-premise software company revenues are expected to grow by about 5 percent in the same period. (Cloud is defined separately and is additional).
It was comforting to hear Gartner’s research as it confirms what the industry is feeling – the bottom (or top) line is looking brighter for the newer tech business models than old ones. So aside from the arguments about what is “real” SaaS versus Cloud (private or public), many traditional software companies are looking at how to move with the market. Having spent the last few years creating a SaaS business within a traditional software company, I am sometimes asked to speak about the journey. Many assume it’s about creating the right multi-tenant architecture or sorting out the technical vagaries of a pure open-source technology stack. While the technology decisions and designs are critical, there are many things on the critical path. In this article, I’ll introduce just a few critical path items in technology, pricing, customer service and contracts.
5-year summary – why would I know?
In late 2005 I participated in a brainstorming session. The question: What new and impactful revenue channels could our enterprise software company add? Many ideas were discussed, with two getting investment. A few weeks later, my responsibilities changed: Startup and lead a line of business inside the company to serve the SMB market which typically would not consider our complex enterprise-style software deployment. In early 2006, we launched our SaaS (On-Demand) offering. By mid-2010, the new line of business had recorded well over $100M in total revenue and had achieved an annual run rate of about $50M ($35M in annual contracts + related professional services) serving over 150,000 subscribers in 135 countries. We showed a breakeven gross margin by the 8th quarter and a 50%+ gross margin by the 10th quarter, with total investment (calculated in gross margin losses) of under $6M.
In the beginning – a few basic decisions:
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| Approaches to Tenancy |
Technology Decisions:
Rather than spend money and time to re-engineer our product, we started in less than 90 days with a virtualized tenancy model, where multiple tenants run on the same infrastructure but have separate database (DB) instances. The enterprise class and heavy security minded companies liked that model better than the more efficient, pure multi-tenancy down to the DB layer. There was (and is) plenty of argument on this topic, but if you’re not starting from a scratch, the place to invest on the technology side is in the user interface experience. Make data integration easy, keep customers’ data locked up tight, and ensure super-fast, highly reliable performance.
Pricing Decisions:
After toying with transaction or complexity pricing components that mirrored operating cost drivers, our pricing model followed the SaaS standard of “per subscriber”. While the technologists understood and even appreciated transaction or complexity driven pricing, buyers didn’t. You can’t sell from a cost-plus model like the old ASPs or hosting models – it’s a value / ROI decision and market-driven.
Customer Service:
Our Service Level Agreements (SLAs) were reasonable, important to customers and limited to items we could easily measure and report. SLAs had penalties associated with them under which customers could make claims for missed SLA’s. Rather than negotiate with each customer on the custom SLA’s each one seemed to desire, we added a customer service guarantee: If for any reason a customer was unhappy with our service during a month (related to the SLAs or not), they could claim up to a 100 percent service credit for that month. Two simple caveats protected against abuse and avoided revenue recognition issues: Claims had to be submitted within 30 days, and if more than three claims were made in any 12 month cycle that were NOT related to an SLA, we (the vendor) could cancel. When you stand behind your service like this, you will get fewer arguments in the negotiation cycle and your own team sees that you’re serious and delivers genuinely great service. This leads to a high renewal rate and a virtuous cycle for providers and customers.
Contracts:
The goal I had for our contracts was the now ubiquitous Web-based “I Accept” style agreements. This was a tough goal as we pressed further into the enterprise space with annual contracts averaging in mid-six figures. We achieved a friendlier contract cycle by putting “fair” terms on-line -- prioritizing customer interests first with truly balanced service description, clear vendor and buyer responsibilities, and all other common terms and conditions included in the online form. We referenced the hyperlinks of the online portion of our contract in our written price and payment terms schedule (the document that gets red-lined and signed). We did not redline the on-line terms, but our “fair” terms permitted customers to cancel without notice if we materially changed the Web based terms and they did not agree to accept them. My experience has been that this “fair” mostly online format, together with the customer service guarantee, speeds up and focuses the contracting process – and gets the relationship off on a good rather than adversarial footing.
Clearly there are many other important areas to address – and the above general topics are highly summarized. Look for more from me on these and other SaaS-related topics, including many sales issues from best practices for incentive compensation to sales tools and methods.
For more information on acquiring the detailed Gartner research presented, please contact Sharon Mertz at Gartner.
About Jeff Saling
Former SVP of Callidus On-Demand at Callidus Software Inc
Jeffrey Saling has more than 20 years experience in starting, building, and operating successful businesses in the technology arena. In his current role, Jeff is responsible for the Callidus On-Demand line of business, since its start-up in 2006.
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