The first part (Part II) of this blog series described the opportunities for software as a service (SaaS) or on-demand applications, especially in the current difficult economic milieu. Part II and Part IIa then analyzed the top five SaaS assumptions (misconceptions) recently outlined by Gartner.
Part IIa and Part IIb also analyzed the major technical considerations that any vendor has to go through before it can embark on delivering a SaaS offering. This final part will will conclude with the Internet hosting service considerations as well as with key success factors (KSFs) for SaaS providers.
What About Hosting, Really?
At the end of the day, SaaS is inherently all about hosting, and someone has to provide that intricate and important service. Another good feature of a commercial platform as a service (PaaS) offering (analyzed in Part IIb) is that it comes with embedded hosting too, one less issue to worry about.
I should note here that the word “hosting” has some connotations and implications. Namely, hosting means to most people taking some servers and putting them in a facility. “Cloud computing,” meanwhile, has the connotation of an entire stack or infrastructure that is already built and proven.
Without a PaaS, a SaaS vendor has to decide between many hosting alternatives such as whether to build a costly in-house datacenter and develop organic infrastructure operations expertise, or perhaps go for managed (dedicated) external hosting or shared (collocated) hosting. Both managed and collocated hosting services are provided by Peer1 ServerBeech, Rackspace, Bluelock, The Planet, etc.
Other options include value-added managed hosting offering by OpSource, as well as cloud computing services such as Amazon Elastic Compute Cloud (EC2), GoGrid, The Rackspace Cloud from Mosso, etc. Apparently, not all hosting is created equal; during the Webcast (mentioned in Part IIa and Part IIb), Scio Consulting International gave clear general advice for any SaaS vendor: go with the highest level of hosting service you can afford.
SaaS’ Key Success Factors
The lengthy technical discussion so far might largely explain why many SaaS vendors have an issue with profitability, so much so that even whopping growth in terms of new customers cannot recuperate the front-loaded costs. As a good indicator, Oracle’s boss is still unimpressed by the on-demand market’s money-making potential. Although Oracle offers pieces of its technology as a SaaS platform for independent software vendors (ISVs), it is not in a terrible rush to rewrite its entire portfolio of applications (sure, there is Oracle CRM On Demand that came from former Siebel and the recently launched sourcing on-demand product).
Indeed, in his ZDNet blog post, Phil Wainewright lauds the following “four horsemen of SaaS”: Salesforce.com, Omniture, Taleo, and Concur. There might be some other large and profitable SaaS providers, e.g., ADP, but I certainly, well, concur (pun intended) with Phil’s assessment. It is interesting to note that these companies have acquired quite large customers, with several thousand seats per site (as mentioned in Part II), and those recurring subscription volumes certainly help absorb their hefty research and development (R&D) and marketing investments.
The recent merger of Xactly and Centive might best illustrate how difficult it is for startup SaaS vendors to reach profitability. Namely, both on-demand incentive and compensation management (I&CM) software providers respectively had great products, good partner ecosystems, and growing install bases, but neither was profitable yet. Investors and venture capitalists (VCs) can be patient only if a SaaS company grows with an acceptable CAC (Customer Acquisition Cost) ratio. For example, an unacceptable CAC of less than 0.5 would mean that it takes over two years to recuperate the cost of acquiring a new customer. The VCs in Centive’s case might have likely decided to jump ship (and salvage their investment) for fear that the vendor would never reaching the break-even point.
Thus, I’ve been pondering on the KSFs for SaaS businesses, and to that end, I recently solicited some SaaS vendors’ concrete opinions and experiences. Namely, given their (possibly gut-wrenching) experiences, I asked some SaaS vendors what is crucial for a traditional on-premise ISV to be successful in SaaS too. Even if we assume that re-writing and re-architecting the product in a multi-tenant way can be done, what else is critical?
According to Aleks Ivanovic, CEO and founder of the SaaS vendor Webcom Inc., one of the most important metrics in being a successful SaaS company is to minimize or eliminate the customer churn rate. Indeed, SaaS vendors are certainly not immune to customer attrition, especially in the time of contract renewals. Aleks said:
“The cost of renewing a customer is significantly lower than the cost of signing up a new customer. If your churn rate is high, no matter how successful your sales and marketing organization is, you will never be able to achieve a significant growth unless you add new customers on top of renewing your existing customers. To minimize churn rates, you need to ensure that existing customers see a good value in your offering once they go live. Their perception of your value will be influenced by the following key factors:
- Does the software do what they thought the software would do for them before they bought it?
- If the answer is “yes,” the next question is whether the software allows users to do what they need to do in an easy and intuitive fashion.
- If the answer is “yes” too, the next question is whether the software can be easily configured via the setup console to accommodate changing business requirements. If the amount of effort needed to make the necessary setup adjustments is perceived to be too difficult or time consuming, the value of your product offering diminishes. Of course, if the software is addressing business processes or industry requirements that do not change, this point is irrelevant.
To ensure you are meeting your customers’ “Value Gauge” you need to ensure the following:
- Monitor the usage level, which is typically a good indicator whether “yes” or “no” is the answer to the first two questions above.
- Provide a mechanism for your customers to give you feedback or easily request new features. This feedback is also a good indicator of answers to the first two questions above. Indeed, if there are lots of new feature requests, you either have a poor training documentation and/or product’s intuitiveness, or your product ultimately does not do what the customer expected.
- If your professional services organization needs to be heavily involved even after a customer goes live, this is typically a red flag that your software is not very well designed to keep up with the ever-changing customer requirements.
As a CEO of Webcom, I am all too familiar with the above issues. We offer two SaaS products. The first one, WebSource CPQ, is used to automate the sales process (configuring, quoting, proposing, and ordering of products, including even SaaS offerings themselves), while the other one, ResponsAbility, is used to automate any kind of business process, such as handling product returns, issues, software bugs, new feature requests, engineering change notices (ECNs), etc. Both our products must by their nature meet all the three criteria outlined above, as our customers are always introducing new products, introducing new and changing existing pricing schemes, introducing new promotions (to improve their top line) as well as constantly changing and optimizing their processes to improve their bottom line.”
A Word From an ERP-Veteran-Turned-SaaS-Newcomer
David Turner, CODA’s Group Marketing Director, outlined CODA’s thought process in delivering the CODA 2go SaaS product on Salesforce.com’s Force.com PaaS as follows:
“For a ‘pure SaaS’ offering you can’t adapt old products – you need to develop specifically for the SaaS environment.
- A multi-tenanted design is essential – since volume is critical to success, you need a scale, and this can only be achieved by a multi-tenanted approach (that’s why SAP has gone back to the drawing board with SAP Business ByDesign).
- There are three key areas of focus – Security; Security; Security. If you can’t demonstrate that you have that 100 percent locked down, you are sunk. See issues around SageLive’s security flaws, recently exposed yesterday by a competitor and then broadcasted in the blogosphere.
- Unless you’re in the business of building infrastructure, then consider the PaaS approach – by building on a leading, proven platform like Force.com from Salesforce.com, CODA has saved time (two years of development); We can focus 100 percent on delivering our domain expertise of accounting rather than building platforms and hosting; Also, security isn’t an issue (see our recent blog post).
Moreover, customers, depending upon their circumstances, want a “spectrum” of approaches to SaaS that would meet their different needs:
- Many clients simply don’t want to manage the IT infrastructure for their software systems — they just want to use them when and where they need them. Hosting their software solutions will satisfy their requirements.
- Often clients’ interest in SaaS is the financial side – the ability to rent rather than buy, pay as they go, or grow and shrink the cost of their systems depending on the need or size of the organization. That is really just a financial discussion around different approaches to paying for access to the software – and we are always prepared to explore innovative ways of helping organizations pay for services in the way that best suits them.”
I also asked how CODA plans to sell CODA 2go, mainly via Salesforce.com’ AppExchange directory, via CODA’s direct sales, via value added resellers (VARs), or all of the above. What about customizing the product (e.g., for some different industries or regions): will it be done by the customers themselves (since the product’s use is so simple), by CODA’s consultants, VARs, etc.? David said:
“Basically all of the above, though the principal methods will be:
- It is on AppExchange, and also one of the first solutions on Salesforce.com’s Checkout service;
- We are building a telesales team working out of centers, currently in the United Kingdom (UK) for Europe and the United States (US) for the Americas;
- We plan to build enterprise sales operations as this becomes necessary.
- We are building a network of services partners to deliver implementation consultancy, and it is likely that these will also deliver support for “verticalization” through market specialists.
- Expansion of the new underlying design principles used to create the new SaaS-focused and SaaS delivered product. Coda did not simply re-write CODA Financials; it is all new DNA optimized to the new platform, but with the same guiding principles that made CODA Financials a success.”
A recent blog post from Dennis Howlett talks about CODA 2go’s first go-live customer, CyberSafe. Given that the product has been generally available (GA) for only a few months, it is too soon to release any meaningful customer figures yet, but the vendor is talking about lots of inquiries and free trials by the prospective customers.
At the end of the day, dear readers, your comments with regard to the opinions and assertions expressed thus far are welcome. How important are the abovementioned considerations in your software selections, and what are your on-demand, on-premise and/or SaaS experiences?
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Hey PJ - Nice SaaSy Series (although Part 1, Part 2 and Part 3 may have been a little easier to follow!)
You make a lot of good discussion points, many of which I talk about in my blog http://www.compensationmanagement.com/
Denis Pombriant wrote a great piece titled “Is it SaaS or Pseudo SaaS?” that speaks to some of the shenanigans going on in the market regarding multi-tenancy claims http://denispombriant.wordpress.com/
Finally, on your point re: SaaS profitability - you have to look at where the companies are in their life cycle. VC’s will be patient with a young SaaS company that is not profitable but growing 100%+ per year. When the timing is right these companies can dial back the growth rate (and dramatically reduce expense) to a more modest 30% and achieve profitability. Its all about timing.
Managed hosting is meant for those websites that are designed to host busy e-commerce sites and dynamic, database driven Web pages. Perfect for organizations that don’t’ have the time or capital to invest in server administration.
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