HiTech. White Paper. 'SaaSification' of Software Products: Redesigning the ISV Value Chain

Transcription

1 HiTech White Paper 'SaaSification' of Software Products: Redesigning the ISV Value Chain

2 About the Authors Gajanan Kamble Gajanan Kamble heads the Software Product Engineering Services group of the High Tech business unit at Tata Consultancy Services (TCS). He has been with TCS for 18 years, and has played key roles in product development, pre-sales, business development, and customer relationship. Kamble works closely with global technology companies in the software product engineering space. He has a Bachelor's degree in Computer Science Engineering from the Government College of Engineering, Amaravati, India. Sampatkumar Dixit Sampatkumar Dixit leads the online portfolio within the Software Product Engineering group of TCS' High Tech business unit. He has over 16 years of experience in product engineering, with expertise in the area of web products and platforms. He has worked with several leading ISVs on large product engineering engagements. In his current role, Dixit works closely with TCS' high tech clients to help them move to SaaS platforms. He has a Bachelor's degree in Mechanical Engineering from the KLE Society's Dr. M. S. Sheshgiri College of Engineering and Technology, Belgaum, India.

3 Abstract The Software-as-a-Service (SaaS) model has grown immensely popular over the last decade, as is evidenced by the emergence of companies like Salesforce.com, Workday, Inc., Dropbox, and NetSuite. It has moved from exploration to adoption for enterprises and consumers alike. Both user segments have realized the benefits that SaaS offers, in terms of usage simplicity and upfront cost reduction. Enterprises are using it to optimize their CRM functions, HR applications, and so on, while consumers are turning to it for hassle-free storage on the cloud (such as Dropbox, Inc. and Box), and other online services. The independent software vendor (ISV) segment is evolving fast, with most companies looking to adopt SaaS, make it core to their product strategy, and scale up to transform into the next-generation ISV. However, this transformation is not devoid of challenges, and requires ISVs to alter their value chains in order to stay ahead in the race. This white paper puts forth five aspects that ISVs should focus on, and incorporate into their value chains, for a smooth transition to the SaaS model.

4 Contents SaaS is the Name of the Game 5 It s all in the Value Chain: Traditional versus the Next-gen, SaaS-enabled ISV 6 Barriers to Transformation 9 Five Aspects You Need to Focus on to Transform into the Next-gen ISV 10 SaaSify products and tweak product strategy 10 Prepare for changes in revenue recognition and cash flows 11 Make IT versatile 11 Gear up for ongoing customer relationships 12 Deal with complexities in SaaS product provisioning and support 12 Conclusion 12

5 SaaS is the Name of the Game User behavior and usage patterns in the software space are indicating a clear shift to the SaaS-based subscription model. Enterprises and consumers are opting for solutions and services that fulfill their business requirements and keep costs low. SaaS-based subscription models offer a multitude of opportunities: anytime, anywhere availability, coupled with shorter implementation cycles, helping businesses remain agile and competitive. In addition, operational hassles are far lower and system upgrades are considerably easier. In recent years, the software space has experienced a fundamental change in the way it operates: from one-time license price to over-the period deferred spend on software services. To keep pace with changing marketplace requirements and buyer behavior, ISVs are changing track and offering subscription-based models for their existing license-based product portfolios, as well as new software products and services. The global SaaS market was valued at US$23.88 bn in 2014 and is expected to grow at a CAGR of 27.9% from 2015 to 2022, reaching US$ bn by the end of this period.¹ Traditional ISVs are trying to reinvent and transform themselves to be able to develop and deliver software, more as point solutions and services, rather than only offering the traditional packaged product. SaaS is increasingly becoming core to the product strategy of ISVs looking to move to the next level. Aside of these conventional ISVs, there are new-age companies that are internet or cloud born, like Workday, Inc. These companies are building products directly on the cloud, and do not have any legacy license-based products. SaaS products in areas such as customer relationship, human resource, and service are gradually gaining popularity. We believe that moving to a SaaS model will impact every aspect of a high tech organization: how a software product is developed, how the business is run, how revenue is recognized, what the sales and marketing strategy is, and how the product is serviced and supported post the sale. Some aspects that companies will need to focus on, in order to fully realize the 'SaaSification potential' are: n Product strategy: For companies with license-based product portfolio, adopting a SaaS model will amount to a change in the product strategy, and involve additional operating costs such as those related to R&D. n Revenue recognition: Revenue recognition is probably the biggest change area. With the SaaS model coming into existence, revenue recognition will be delayed because it will be recognized periodically as against upfront payments in license-based models. This could lead to an initial cash crunch for companies. n Customer engagement and market responsiveness: The SaaS model will transform customer engagement from one-time transaction to an ongoing relationship. Customer retention will become a key priority. SaaS models will also offer businesses the opportunity to expand their market outreach and explore new customer segments. With low initial cost, and easy configuration and customization, the SaaS product model is bound to become immensely popular as it will allow companies to reach out to wider markets and expand their product portfolio to small and medium enterprises (SMEs). For example, Oracle has offered its transport and global trade SaaS product to SMEs. n IT enablement: Companies running license-based businesses will have to equip their IT landscapes with advanced capabilities, such as usage-based billing, to run the SaaS business effectively. [1] Transparency Market Research, Strengthening Software Outsourcing Trend to Drive Global Software as a Service (SaaS) Market to US$ bn by 2022 (October 2015), accessed May 16, 2016, 5

6 It's all in the Value Chain: Traditional versus the Next-gen, SaaS-enabled ISV You may be familiar with the traditional license-based ISV value chain, but it is worth a discussion in the context of developing SaaS-based products, and comparing it with the value chain of SaaS-based companies. Figure 1 illustrates the components of the traditional ISV value chain. Inbound Operations Outbound Logistics Sales & Marketing Service Ÿ Market research Ÿ Product vision Ÿ Acquisitions, mergers, strategic partnerships Ÿ Technology and subsystems selection Ÿ PoC Ÿ Strategic sourcing Ÿ Acquisition of technology, software, hardware, data, service capacity Ÿ Product strategy and business Ÿ Product design and development Ÿ Product testing Ÿ Product integration Ÿ Release Ÿ Documentation Ÿ Ÿ Production and packaging (traditional and cloud model) Distribution Multichannel sales and marketing Ÿ Segmentation and campaign Ÿ Customer engagement and commerce Ÿ Partner and channel Ÿ Sales pipeline and order Ÿ Implementation Ÿ Training and certification Ÿ Maintenance and customer support contract Ÿ Multichannel customer support (call center, selfservice portal, social media forums) Figure 1- Value Chain of Software Companies with License-based Products (Source: TCS Internal) For a traditional, license-based ISV, inbound activities focus on market research, the right product vision, and the selection of appropriate software and hardware, platforms, and technologies. These activities serve as key inputs to core product development activities, including roadmap creation, design, development, and the final release. Companies continue to use different product development methodologies depending on their business requirements and product strategies. Outbound logistics activities include packaging and distribution of the product to retailers, resellers, and value added resellers (VARs), and so on. Activities include packaging all product documentation and media, and subsequent distribution. Sales and marketing for license-based software products involves customer analysis and engagement, segmentation, target strategy formulation, campaign, and partners and channels. For license-based ISVs, the revenue model is based on a one-time sale, with supplementary revenues coming from post-purchase maintenance and service. In the license-based model, product support and after-sales service are major requirements. High tech organizations follow a variety of service and support strategies. Products are typically designed keeping in mind their post-purchase support requirements, most of which involve obtaining required data from the customer's environment so that issues can be recreated, and thereafter, fixed. 6

7 Let us now look at the 'SaaSified' ISV value chain. The SaaS-based product value chain (see Figure 2) differs significantly from the typical license-based value chain. Inbound activities continue to focus on product vision and research. There is increased emphasis on selecting the right platforms and software on which SaaS products are developed. While some products may be developed on existing Platform-as-a-Service (PaaS) offerings, others might be built from scratch. Decisions related to infrastructure, platforms, and software vary, based on the company's product strategy. Inbound Operations Outbound Logistics Sales & Marketing Service Ÿ Market research Ÿ Product vision Ÿ Acquisitions, mergers, strategic partnerships Ÿ Technology and subsystems selection Ÿ PoC Ÿ Strategic sourcing Ÿ Acquisition of technology, software, hardware, data, service capacity Ÿ Cloud platform selection Ÿ Product strategy and business Ÿ Product design and development Ÿ Product testing Ÿ Product integration Ÿ IT integration (billing, metering, payment gateways, CRM, and so on) Ÿ Provisioning Ÿ Release Ÿ Documentation Ÿ Service operations Ÿ Hosting Ÿ Monitoring Ÿ Backup Ÿ Upgrade Ÿ Service platform implementation Ÿ Portal implementation (changes for SaaS, ecommerce) Multichannel sales and marketing Ÿ Segmentation and campaign Ÿ Customer engagement and commerce Ÿ Partner and channel Ÿ Sales pipeline and order Ÿ Adoptive pricing and usage-based billing Ÿ Migration and configuration Ÿ Customization and multi-tenant implementation Ÿ Upgrades Ÿ Training and certification Ÿ Subscription and billing Ÿ Multichannel customer support (call center, selfservice portals, social media forums, support contract ) Figure 2 - Value Chain of Software Companies with SaaS Products (Source: TCS Internal) Activities such as product development add a new dimension to preparing the core team for continuous product release and deployments, with Agile and DevOps gaining prominence. Further, since products need to be designed for the SaaS model, there is additional focus on measuring product usage, integration with IT systems, analytics, API architecture, and support and services requirements. The outbound and logistics pillar for the SaaS-based product value chain is the primary differentiator. The distribution of a SaaS product is handled in a manner that is very different from the traditional license-based product delivery. The type of subscription is the deciding factor that enables product functionality access to the end user. Customer onboarding processes play a critical role in enterprise product delivery. This pillar also adds activities relevant to platform integration, with IT systems running the business. Companies will need to revisit their sales and marketing strategies as well. Instead of putting the products on retail store shelves, online selling becomes the primary sales channel here. Usage-based billing adds additional scenarios to create compelling value propositions for customers since they need not pay for the software as a whole, but only when it is used. Analytics plays a key role in the overall success of the SaaS model. Customer retention is a critical parameter for SaaS-based product businesses, as recurring revenue is practically their lifeline. Analytics techniques are integrated in products to measure and improve customer engagement, product quality, sales and marketing effectiveness, and product support services. 7

8 Product service and support is one of the significant areas of change when implementing the SaaS model. Service and support are tagged to subscriptions. The SaaS model requires support in additional areas such as customer provisioning and onboarding, tenant customization, billing and subscription, and product function. The secondary value chain or IT systems supporting the primary business is one of the major areas of change. The IT function should implement new systems or modify existing systems to adopt to change in licensing, billing, procurement, payments, sales and marketing, customer relationship and many more. Table 1 lists the changes ISVs need to bring about across the value chain in order to successfully adopt the SaaS model. Traditional ISVs SaaS ISVs Product Long-term execution plan as release cycles are longer Periodic customer feedback Frequent releases with constant prioritization Continuous feedback loop to capture real-time customer sentiments Product development and testing Agile or Waterfall development models; longer release cycles IT systems to run the business are often independent of the product team Agile development, continuous integration and release, DevOps methodology Product and IT teams work closely Software packaging and deployment Products are packaged as installable modules and are installed by product experts Products are hosted as solutions on the cloud, with automatic provisioning in real time (complex enterprise products may be installed or configured by experts) Sales and marketing Through third-party resellers and OEMs or product partners; marketing is conducted through channels or partners; longer sales cycle Through online channels such as e-commerce websites; smaller sales cycle due to lower initial cost of subscription Product support and maintenance Product support over call, chat, s, and online forums with defined L1, L2, and L3 support streams Due to complex product environments and custom environments, patch releases or custom fixes are cumbersome; they tend to slow down overall product Round-the-clock support through online forums and chat clients, which allows product upgrades in real time With multi-tenancy and customer-specific instances of the product, support is more critical and complex DevOps and other automation practices are a norm in SaaS product maintenance Implementation and customization Heavy customization is required in the enterprise product category Allow easy customization Table 1: Key activity-level changes for the SaaS model (Source: TCS Internal) 8

9 Barriers to Transformation While some leading ISVs like Adobe, Microsoft, Saleforce.com, and SAP have implemented SaaS, many companies have started adopting it for their existing or new product portfolios. This transition to the SaaS model, however, is not free of challenges. The first barrier is competition from new-age SaaS companies. These new age companies do not have legacy products, which makes them more agile and responsive to market needs, allowing them to quickly launch innovative products and services. These companies, such as Dropbox, Inc. and Workday, Inc., have captured the market in a considerably short time. Demand-supply mismatch is another challenge that ISVs need to deal with. The demand for SaaS solutions continues to rise steadily. Although ISVs have increased their R&D spends to move into the SaaS space, many often encounter shortage of talent, bandwidth, and scale to develop innovative SaaS products to meet market demands. IT systems supporting the SaaS business of most ISVs are not fully ready to scale up, which slows down SaaS adoption. Customer retention is of paramount importance when it comes to deploying a SaaS model. The existing analytics techniques and IT systems that ISVs work with, are not equipped enough to extract insights on customer retention that ISVs can use for customer retention efforts. To ensure a seamless transition to the SaaS model, companies will need to overcome these challenges by making changes to their traditional value chain. Some areas that will need to be reoriented include software product development, the way the business is run, revenue recognition, financials, sales, marketing, product service, and support. 9

10 Five Aspects You Need to Focus on to Transform into the Next-gen ISV For traditional ISVs, looking to transform into a next-gen, SaaS-enabled business, making changes to the value chain becomes imperative. Changes are required primarily in the following areas (see Figure 3): Hosting product in the cloud Rearchitecting the product for SaaS model Building products from scratch SaaSifying Products and Tweaking Product Strategy Change in IT systems to run the business, including customer, metering, billing, revenue recognition, and so on Making IT Versatile Preparing for Changes in Revenue Recognition and Cash Flows Changes in finance systems and overall finance Adopting the SaaS Model Gearing Up for Ongoing Customer Relationships One-time sales to ongoing relationships Dealing with Complexities in Provisioning and Support Changes Seamless onboarding through self provisioning Continuous support Customer Intelligence Figure 3- Prerequisites to SaaS transformation (Source: TCS Internal) SaaSify products and tweak product strategy For an ISV with a license-based product portfolio, moving existing products to SaaS either means 'SaaSifying' existing products, or building new ones. This translates to additional operating costs, specifically in R&D. There are different approaches to SaaS-enable products. Primarily, we have observed three scenarios: n In the first approach, ISVs make minor changes to product functionality where modifications are made to support online installations while moving the pricing strategy to a usage-based or subscription-based model from the one-time license fee model. This product category is actually cloud movement and not 'real' SaaSification. n Some ISVs prefer rearchitecting their products considering auto provisioning, elastic scaling, multi-tenancy, and so on. This is important so that the products can be hosted on elastic cloud environments to optimize hardware costs, reduce infrastructure costs, and achieve just-in-time scale. n The third approach is building products from scratch to suit the subscription-based model. Products are built on the latest PaaS platform, to make use of the advanced inbuilt features of PaaS. 10

11 It must be noted that in all product categories, metering the usage of a product is vital. This serves as a critical input to product pricing of the product. Figure 4 illustrates two scenarios of SaaSification of products. Host on Cloud IT Changes for Subscription Management Legacy On Premise Product Minimal changes in the actual product Build for Cloud Architectural and code changes for cloud enablement Billing systems Subscription Product intelligence Metering systems Sales systems Online support (chats and forums) SaaS Product Subscription-based software Figure 4: Strategies for SaaSification of Products (Source: TCS Internal) Prepare for changes in revenue recognition and cash flows Revenue recognition is a crucial aspect that needs consideration when adopting the SaaS model. The majority of the revenue for traditional, license-based ISVs, comes from one-time software sales, which is then supplemented by smaller recurring revenues from maintenance and support. With the subscription-based model, revenue recognition tends to get delayed, which may lead to initial cash crunch for ISVs. License-based ISVs will need to play the balancing act while moving to the SaaS model, as they will have to condition their customers and channel partners accordingly. As the pricing model undergoes a change, finance systems on which invoicing and account payables and receivables are managed, need to be modified to accommodate cash flows from subscription-based models. Make IT versatile For most ISVs, the IT systems supporting the SaaS business are not yet ready to scale. When adapting to the subscription-based model, ISVs need to make sure that their IT functions are well-equipped to run the subscriptionbased business effectively, as well as the existing license-based portfolio. This requires significant modifications in the IT systems pertaining to operations (such as usage tracking or rating, metering and billing systems, license and SLA, customer and product analytics, sales and marketing, and product support and service). Integration and workflow of these application and functions will be critical to get accurate reports and operational parameters for strategic decision-making. 11

12 Gear up for ongoing customer relationships With the SaaS model, customer engagement changes from a one-time sales transaction to an ongoing relationship due to the subscription-based pricing and usage model. ISVs are finding that their analytics and IT systems need to do much more to get insights around customer retention a key success factor for SaaS models. Analytics plays a vital role in obtaining customer intelligence and improving product development as well as support strategies. What ISVs should also bear in mind is that the way customers consume the software can also change with the subscription-based model. SaaS-based software is designed for high availability across the globe, along with customizable feature sets according to different subscriptions, so that minimal changes are required to adapt to new growth strategies. The SaaS model also offers an opportunity to expand the market and reach out to new customer segments or verticals. This opportunity to verticalize products is one of the key growth strategies being employed by most ISVs that have adopted the SaaS model. Some examples are, Infor for the food and beverages industry and Siemens Product Lifecycle Management (PLM) for the retail sector. Deal with complexities in SaaS product provisioning and support Consumers of SaaS products expect immediate access to post-purchase services. Ideally, the systems should be designed for self-provisioning, which will automate the backend process to provide customers with a seamless onboarding experience. Depending on the product type, provisioning scenarios may change and ISVs will need to consider this as an important aspect. For complex enterprise products, manual intervention during provisioning will be required. Moreover, provisioning will have to be tightly integrated with resource, metering, billing, and so on. Support strategies will considerably change in the SaaS model. Round-the-clock live support with forums and chats will be key product support mechanisms, and will have to be built into the product. With multi-tenancy and customer-specific instances of products, support is bound to become more critical as well as complex. Conclusion As companies embark on the journey to move to a Software as-a-service model, several changes will need to be brought about across the value chain. To incorporate these changes, companies will have to alter their existing product and IT strategies. With fierce competition in the SaaS market, there is immense pressure on traditional product companies to migrate their existing product portfolio to SaaS-enabled models quickly, and for existing SaaS vendors to release new features at a faster pace. 12

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