Transition to SaaS: Promises, Pitfalls, and Planning for Success V 1.0
Software is eating the world. - Marc Andreessen 50% of ISV's will FAIL ONCE before rolling out a successful SaaS strategy. - Montclair Advisors 2
Table of Contents 1 Executive Summary... 4 2 Background and Context for Making Decisions about SaaS... 5 3 SaaS: Understanding the Case For Change... 6 4 SaaS-ification Models... 8 4.1 Simple Software... 9 4.2 Customized Software... 9 5 Why Move to SaaS Now? Drivers.... 11 6 Transition Archetypes... 13 6.1 Traditional... 13 6.2 Hybrid... 14 6.3 Cross-Over... 14 6.4 Pure SaaS... 14 7 The 5 Steps of a Successful Transition to SaaS... 15 7.1 #1 Start with the End in Mind... 15 7.2 #2 Think Customers First... 17 7.3 #3 Build a Lead Machine... 19 7.4 #4 - Sell a Service, Not a Product... 21 7.5 #5 Drive Customer Success... 22 8 More than Subscriptions... 24 9 Summary... 25 10 About Avangate... 26 3
1 Executive Summary Traditional software firms are in a bind. The software business model and technology delivery models that they once knew and cherished are undergoing massive shifts due to the rise of the Cloud, and subsequently Software as a Service (SaaS). And SaaS is clearly a trend, not just a fad. The choice that emerges for traditional software firms is stark: adapt or slowly fade away. While there is plenty of software industry guidance regarding SaaS practices, most of this advice is primarily applicable for companies that were born in the cloud and have used SaaS since their inception. This paper is designed to help existing software firms who may be struggling to become SaaS providers develop a proactive plan for a successful transition to SaaS. This whitepaper details the broad trends that are driving the software industry toward SaaS; provides an objective framework to determine what shifts may be necessary for a particular company; and outlines the critical questions that will help define the end-state of any SaaS project. The paper also clarifies that the end-state of a project cannot always be predetermined because it is dependent on the readiness of the software firm in question. Finally, the paper provides pragmatic, customer-focused tips for making the shift to SaaS. The best practices provided in this paper have been gleaned from our collective experience providing ecommerce services to several thousand independent software vendors (ISVs). The software industry is undergoing a massive shift to SaaS. Your customers success and your success are much more closely linked than ever before. Adaptable competition, high customer expectations, and low barriers to moving are disrupting software markets. The need exists, and the time to start seriously considering a shift to SaaS is now. 4
2 Background and Context for Making Decisions about SaaS Is it time for my company to make the shift from traditional software delivery methods (such as physical and electronic downloads) to providing SaaS and Cloud Services? If you are in the software business, the amount of press and buzz around SaaS can make you feel left behind and raise questions about the effectiveness of your current software delivery strategies. You re likely asking yourself whether it s time to make the switch to SaaS. It s clear that the SaaS revolution has already started. Leading analyst firms are actually forecasting an increase in cloud services spending, even in the face of a global economic slowdown. This means that the need to decide whether to use SaaS is more pressing than ever. In the onslaught of pressure on current business models, some companies retrench in optimizing current business models, whereas others seek a framework for making an objective decision about SaaS. Making this decision involves weighing various aspects of a company: current state of maturity, organizational readiness, business model and profitability, technology disruption, and more. It s a complicated decision to make, but understanding some SaaS basics will help immensely. 5
3 SaaS: Understanding the Case For Change What larger changes are resulting from the industry shift to SaaS? Companies that haven t already made an informed decision about SaaS must do so quickly, or risk being left behind the competition. The pace of industry disruption is rapid for software delivery: distribution for the entire market is expected to flip, from two-thirds physical software delivery to two-thirds nonphysical delivery in just 4 years! This significant shift will require careful planning to accommodate. There are several important ripple effects of this accelerated industry disruption: Customer expectations are changing Today, software vendors are dealing with a highly sophisticated buyer who is much more aware of the many products and services available than ever before. Buyers are in control. They demand to purchase software when they want it, and have it delivered by their preferred method. Vendors that can instantly gratify buyers with instantaneous purchase and delivery across multiple channels are in the best position to succeed. 6
Pay up front is being replaced by pay-as-you-go Another fundamental change involves the shift from perpetual licenses to usage-based subscriptions, a core feature of SaaS companies. Irrespective of the macroeconomic drivers for this shift, subscription-based service is a reality that needs to be factored into the profitability, sales models, and cash flow of any software company adopting SaaS. New distribution is complicating discovery Distribution becomes another critical issue as the many factors involved in getting a software product to market are democratized. It is cheaper to start a software business now than at any other time in history, due to affordable computing power, storage, and bandwidth, as well as open source development tools. With so much competition, the hard part mostly lies in the ability to be found by customers. Companies may leverage marketplaces, affiliates, app stores, direct ecommerce, channel partners, or a combination of all of the above to sell and promote their products. 7
4 SaaS-ification Models What challenges and opportunities will my company face as we work toward a SaaS model? To better understand the process and challenges of putting SaaS in place, let s create a model to help frame the current trends and players. As shown in the figure above, the SaaSification model has two axes: Software Type: Simple Software <--> Customized Software Delivery Type: SaaS <--> ESD/On-Premise Software 8
The companies shown in each quadrant provide some context for understanding the characteristics of the various software types, which are defined in more detail below. 4.1 Simple Software Simple software has the ability to solve specific problems very well. Simple software is typically: Focused on B2C services: mail, storage, productivity, entertainment, etc. Sold online via application stores First to be SaaS oriented Key Challenges for Simple Software Getting attention in a world of exploding competition and channels Monetizing the product 4.2 Customized Software Customized software tends to solve complicated, enterprise-wide problems. Think of the solutions offered by companies such as Oracle and SAP. Customized software is usually: Focused on B2B issues such as Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), Human Resources (HR), or Finance Distributed by a combination of direct sales force and Systems Integrators (SIs) or Value Added Resellers (VARs) that form a complex, interdependent sales ecosystem Installed on-premise in target enterprises data centers by IT staff 9
Key Challenges for Customized Software Consumerization of IT : buyers expect to consume applications with the ease of simple software while getting the results of customized software Disruption by simple software moving up the stack to serve the needs of the lower end of the business spectrum with benefits such as increased configurability and simpler pricing Ability to offer a customized platform, which usually involves a big investment in customizing SaaS tools Software vendors have to choose where to position themselves to maximize opportunities within the quadrants shown: simple or customized software, delivered by SaaS or ESD/onpremise. A growing separation of customized and simple software is happening at all levels of the software industry. Simple software reflects widespread growth in online access as well as the lower costs of development, delivery (ESD or SaaS), and distribution. Online distribution has significantly opened up the simple software markets to include: App(lication) stores Affiliate programs Search Marketplaces Simple software is a growing market that doesn t benefit only consumers. The consumerization of IT has opened up enterprises to using simple applications that can be purchased online, whether directly on the vendor s website or an enterprise app store. 10
The customized software market, which consists largely of platforms extended by SIs for uses specific to a particular company, is just beginning to open up to SaaS models. These customized platforms reflect growing bi-modal markets that raise questions about how companies can participate in the growing ecosystems of solution providers. Options may include Becoming a platform, which requires substantial upfront capital investments in frameworks Playing in another ecosystem, and investing in distribution for discoverability Both simple and customized software companies can benefit greatly from moving to SaaS, but each type of company faces different challenges when making the transition. 5 Why Move to SaaS Now? Drivers. The SaaS model has been proven and is maturing rapidly. Some general drivers of the immediate need for transition for SaaS include: Customer readiness Ability to accelerate product evolution in fast changing markets with fast deployment Benefit of scale economics in high growth markets Disrupt new markets no implementation or hardware requirements Potential to improve company valuation: the multiples accorded to SaaS companies are higher than traditional software firms In a recent survey, software vendors using the Avangate platform confirmed the popularity and effectiveness of the shift to new business models: Over 45% use subscriptions 23% made more than 50% of their revenue from subscriptions 11
Other companies are in various modes of transition some using SaaS, some experimenting with hybrid models that incorporate subscriptions and ESD Perhaps surprisingly, many companies are still trying out subscriptions to evaluate different SaaS-based business models, such as free trials, paid trials, yearly renewals, and even monthly renewals. The move towards SaaS has almost mandated the model of trial with a widespread expectation of being able to try before you buy. The free trial model can be a good first step toward implementing SaaS, but requires careful planning to ensure that it boosts business. 12
6 Transition Archetypes Transitioning to a SaaS model starts with choosing the end state you want to achieve. It s important to note at this point that SaaS may not be the best end state for every scenario. There are 4 key end states that we have developed based on some excellent work done by our industry colleagues. These states are: Traditional, Hybrid, Cross-Over and Pure SaaS. Inspired by Montclair Advisors with further interpretation by Avangate 6.1 Traditional 13
Most traditional software companies remain concentrated on perpetual license sales in an onpremise delivery model. This is especially common among mission-critical applications and in highly regulated verticals such as Finance, Insurance, and Pharmaceuticals. There is limited, if any, incentive to transition to SaaS for entrenched players, and any such transition will be complex. However, deregulation offers many opportunities for disruptive players to emerge, and SaaS always remains a possibility for future developments. 6.2 Hybrid The primary driver for considering a hybrid state is to extend the value of the current platform investments. The hybrid model exists when there are no distinct products for both the existing customer base and net-new prospects. Customization capabilities remain limited in this model, which is applicable in very few scenarios. Some infrastructure vendors promote this model from a perspective of creating virtual appliances, and a hybrid structure may also be popular for hardware cost savings programs. 6.3 Cross-Over An advanced end-state is the cross-over, which involves a conscious decision to make a business model shift toward SaaS. In this case, all new customers are on-boarded to the SaaS version, but current customers are not immediately migrated over. The primary driver for this state is, of course, competition, which may or may not be nipping at a company s heels and impacting real revenues. It is critical in this state to ensure current customer satisfaction while simultaneously ensuring that cash flow is not impacted by the transition. In addition, cross-over can be an interim state for companies looking to improve company valuations by using SaaS. 6.4 Pure SaaS Pure SaaS firms are, by definition, young companies that are born in the cloud. These firms are not encumbered by legacy architectural decisions with costs being paid by other firms in 14
the previous states. While pure SaaS companies may enjoy more flexibility to deploy their products, they may also face larger challenges in finding a reliable customer base and in achieving efficient channel operations. 7 The 5 Steps of a Successful Transition to SaaS What steps can I take to ensure that my SaaS transition is successful? 7.1 #1 Start with the End in Mind 15
Choose the model that best fits your need See the previous section of this paper to determine whether your company should use a traditional, hybrid, cross-over, or pure SaaS model, and understand the implications of each. Segment your customers 1. What segment makes the most sense to begin the transition: current customers, new segments, or current customers with different needs? It is usually agreed that new customers are easier than existing ones to move to a new platform without incurring expensive migration costs. 2. What are the well-defined, repeatable parts of your current solution that can move to SaaS and are common over a wide range of customers? How could that component of your solution be offered as a SaaS add-on? Start to experiment and see what works for your customers. Understand your costs You must understand the costs of both tangible and intangible processes before you decide to move to SaaS. Decide on and relentlessly measure your key process metrics with the benefit of real-time feedback to the organization during the transition, allowing for recalibration and improvement. Leverage other aas to outsource non-core components Outsource hosting, and plan to exit from the on-premise delivery model, as this cannot be maintained over the longer term. Even some of the largest enterprise software vendors in the world have not been able to sustain a dual investment in SaaS and on-premise delivery. 16
Automate support As the number of customer touch points increase, it will be imperative to invest in a selfservice or community network to enable customers to help one another. Otherwise, the cost of customer contact may outweigh the cost savings or increased revenue of SaaS. 7.2 #2 Think Customers First In SaaS, remember that renewals and increased usage become the lifeblood of the business. It can be difficult to make the shift from one-time licenses to maintaining a continuous, ongoing customer relationship, but the service part of SaaS is more important than the software part. Providing excellent service at every touch point is required, even when handling many more support cases than usual. 17
Plan specific communication paths with customers, not only for support purposes, but also for education. The increased frequency of product releases with SaaS makes it critical to notify users what to expect from new features and how to use them. With every release, be sure you can track what features the customers are using by building instrumentation and analytics into the platform. Many new business metrics come into play in SaaS. Some of these include: CAC (customer acquisition cost) MRR (monthly recurring revenues) ACV (annual contract value) CSR (customer satisfaction rate) Ensure you are not only tracking these metrics, but setting goals to improve them for each buyer profile. Build a customer community with an internal customer champion (providing the voice of the customer) to ensure customer requests are assigned the right priority and resources are allocated appropriately. Additional suggestions for driving customer success in the long-term are found in step 5 of the SaaS transition process. 18
7.3 #3 Build a Lead Machine With most SaaS companies, the deal sizes tend to be smaller. The imperative shifts from focusing on just a few large deals to emphasizing the efficient execution of a greater number of deals with a shorter sales cycle. This requires building a full sales funnel through an ultimately automated Lead Machine program. Some characteristics of this program include: 1. Freemium model Allow new prospects to use some version the product for free, if possible. In the new paradigm, usage is the new way to engage, and engagement leads to monetization. Trials and test drive programs are a good way to get early feedback and ensure that a more focused approach to conversion can follow. 19
2. Land and expand This strategy refers to building on the trust established by the initial engagement in order to win additional business with the same customer. This approach is no different from the traditional software world, but can be fine-tuned and accelerated in the SaaS model when you are armed with usage data. This enables the pinpointing items of value that can be targeted for up-sell and customer retention. 3. Make friends The best SaaS firms create ecosystems that engage and retain customers. Identifying key partners for customer acquisition (e.g., companies selling into the same markets and targets), retention, and distribution (channel partners) improves lead flow and ensures a greater degree of market coverage. 4. Put lead generation on auto-pilot Auto-pilot is the holy grail for software companies, the point when new qualified leads keep coming in from the established lead generation system. In order to reach this state, you must clearly identify the buyer personas, the purchase path, and the content arc that prevents prospects from leaving you for the competition. Segment your treatment of customers to ensure that each type of customer gets the appropriate level of interaction, from self-service to inside sales or telesales to direct sales. The sales model will depend upon the lead qualification criteria established for each channel. 20
7.4 #4 - Sell a Service, Not a Product As noted, the service part of SaaS matters more than the software part. This is a departure from the traditional software world. A key part of the shift in mindset for SaaS involves thinking about application programming interfaces (APIs) from day one, leading to faster, easier to use and purchase components. Customers who use the web and APIs to mash-up apps are becoming increasingly common. Services not only allow for new partnerships to be created with exposed APIs, but can also be bundled to create a whole solution for customers. This is reflected also in the shift that VARs and marketplaces are making (creating bundles and additional services) to avoid being commoditized. In general, it is impossible to predict which parts of your platform will see demand and the opening up of key pieces of the platform will ensure that the widest net is cast in terms of driving usage and adoption. 21
7.5 #5 Drive Customer Success SaaS shifts the profile of customer advocates from the traditional framework by emphasizing different value points, the most crucial of these being education and communication. Education To drive customer adoption of SaaS products, the first step is to educate your prospects about product benefits and capabilities. There are several popular educational vehicles to choose from: ongoing webinars with a content arc that matches your buyer interests, free initial training sessions, online resources such as blogs and whitepapers, and sharing best practices of the industry during events and tradeshows. 22
Self-service portals The SaaS model requires that customer support organizations be turned on their head to become more market-friendly and encourage knowledge exchange between customers. Increased communication empowers customers to solve their own problems. This can be facilitated by self-service customer portals or communities, several of which are available in the market (often as SaaS solutions). In addition, creating content to address frequently asked questions (FAQs) and improving search capabilities will help decrease load into the support organization. It is also necessary to proactively and regularly measure customer satisfaction, which also enables rapid identification and resolution of issues. In the process of creating a self-service support community, don t forget to reach out to the developer community, especially to promote API adoption. This includes creating dedicated forums, code samples, test stubs, and other technical guides that can help drive further adoption among new customers. Customer success teams In addition to managing customer self-service portals, consider creating dedicated customer success teams that are responsible for ensuring product adoption, particularly in strategic accounts. This additional investment will prove instrumental in ensuring a long-term customer relationship, as well as improving renewal and revenue predictability. The customer success team should typically be a cross-functional team that incorporates support, implementation, and documentation staff. Social media monitoring and incentives Recognize the impact of social media, which is favored by vocal advocates (and detractors), and set up programs for social monitoring. This is a good opportunity to leverage customer success teams to gather social data about customer satisfaction and product usage. Incentive planning for advocates that involves non-monetary items such as marketing materials, event passes, and 23
customer testimonials can help both parties gain knowledge and advocates in the industry. Leverage case studies and nurturing programs on your website to continuously add to the lead funnel by recognizing customer successes. 8 More than Subscriptions So does moving to SaaS just mean adding renewable subscription capability to a product and that s it? Not at all. As you think about your SaaS strategy, remember that the ability to invoice on a recurring timeline is just one step in a larger process. Here are a few other items that you need to factor in: Product catalogs; Merchant of Record v/s Service Provider; Payment processor integration; Risk Management; Fraud Screening; Taxation and VAT; Commerce expertise ; Channel enablement; Integrated solution; Cost of integration for a complete business process flow; 24X7 support. 24
9 Summary This paper has clarified the reasons for and challenges of transitioning to a SaaS model, defined SaaSification models and transition archetypes, as well as provided step-by-step instructions for ensuring customer adoption and success in SaaS. By understanding the opportunities and difficulties inherent in SaaS, defining your company s SaaS model and transition archetype, and taking the appropriate steps to create robust lead generation and customer support systems, you can set your company up for initial and continued success in SaaS delivery. Even as you find your foothold in SaaS, return often to these models, and fundamental steps in the SaaS transition process. Never forget that customer success on the new model will play the most critical role in establishing the legitimacy of SaaS as a delivery model, and constantly strive for new ways to find, educate, and convert customers to ongoing SaaS usage. 25
10 About Avangate Avangate is the agile ecommerce solutions provider trusted by Software and SaaS companies to grow their business worldwide through any channel, any model. Specifically designed for software markets, Avangate's scalable and integrated solution includes a full-featured, modular and secure ecommerce platform, a partner order and revenue management system, as well as a constantly expanding worldwide affiliate network. Avangate's market-proven ecommerce solution enables software companies to rapidly embrace industry shifts, reach customers effectively, and adopt new business models with a view to optimizing profitable revenue across online and offline channels. More information can be found on www.avangate.com Avangate Inc. Redwood City CA., USA Tel: (650) 249-5280 Avangate B.V. Amsterdam, The Netherlands Tel: 31 20 890 8080 info@avangate.com www.avangate.com 26