SaaS, often also referred to (in my opinion somewhat misleading) as Cloud Computing (which is more IaaS/PaaS related), means to provide a software application as an online service. Such services are accessed through the Internet (e.g. for groupware or email exchange) or sometimes through dedicated networks (e.g. for hosted PBX). SaaS services are usually billed on a monthly basis.
This concept of delivering software has been around for quite some time (we all remember the ASP model in the nineties) but with new sharing and virtualization technology developments in the past years, it has now reached a status, where it can be done efficiently and cost-effectively. SaaS is therefore on the way to become the dominant software business model. As the tremendous success of SaaS pioneer salesforce.com shows, this model provides some compelling advantages for end customers. It is highly flexible (you usually only pay seats that you really need) and very easy to set up (you basically sign up for the service, maybe do some configuration, and start using it). End customers do not need to worry anymore, about software installation, updates and upgrades or data backup and restoration. As any serious TCO (Total Cost of Ownership) study reveals, the highest costs for on-premises software result from operations and maintenance.
And that is where the value proposition and the business case for service providers come in. With VoIP, Hosted PBX and others, traditional carrier services and Internet services have merged (which is also why web hosting companies increasingly offer voice products). Therefore, SaaS products should be the new core products for carriers and service providers (and even utilities) unless they want to end up as mere infrastructure providers (which utilities already are). SaaS services perfectly fit to the service provider’s brands and can be well combined with “traditional network products”. By not offering SaaS products you would not only give up quite a substantial portion of market share and margin, you would also miss leveraging valuable, existing intellectual capital. I believe, SaaS is a great opportunity for all service providers to compensate for declining revenues from commodity products like DSL and VoIP (or energy), and to generate new revenues at attractive margins.
But what service provider offer to their customers, they also expect from their vendors (or at least their suppliers should offer it to them). So with SaaS, the business model for software vendors has changed as well. We all still remember the great times of large perpetual license deals and now it should be all pay-as-you-go on a monthly basis? Well, yes, but SaaS has some great advantages for ISVs too. Customer relationships become more intense (usually in a positive way), product release cycles have become shorter (which mostly means, products improve faster) and you as an ISV know much sooner how well (and if at all) your software is used by your customers. The greatest advantage however, is that you can build up a base level of already secured revenues for your budget year and that you can grow with your customers.
But that has a couple of implications:
1. You as an ISV don’t start at 0 revenues at the beginning of the fiscal year anymore. You already have a revenue base from the customer contracts of the previous years. That has a great advantage for your sales forecast – it makes it a bit robust. The risk of closing new deals only applies to the new revenues on top. However, there is also a flipside to it:
Since revenues from new customer projects are no bulk revenues anymore, but usually monthly revenues stretched over the contract term, your forecast for the year is now more sensitive to deal delays. Perpetual license revenue you can usually book the same month you ship the software (which is mostly the same month the order gets in). So theoretically, you could get all your orders in December and still make your annual plan. With SaaS revenues, if you did the same thing, you would end up with less than 20% of your initial forecast (continuous revenue streams assumed).
2. Another uncertainty to your sales plan comes from the fact that your revenue now depends on the growth of your customers (meaning how well they market your product). Therefore, Sales in software companies has to focus much more on customer retention and not only on customer acquisition anymore. Strongly focusing on winning new customers used to be the most effective way to grow for start-ups, now with SaaS it is not anymore. Enabling and continuously supporting your customers with selling your product to their customers is a pre-requisite to ensure revenue growth. Therefore, mere sales skills are not sufficient anymore, also channel management know-how as well as marketing and business development capabilities are now required (which really are quite hard to find in one person).
So, what about “hunters” and “farmers” in ISV’s sales teams? Well, that distinction is probably not valid anymore. With SaaS each “hunter” also needs to be a “farmer” in order to ensure future revenues and customer retention. I used to consider myself a strong hunter but I also learned to build up and to maintain a long-term relationship with customers. Customer relationship management has become much more important, losing a customer does not mean to lose 10-20% maintenance revenue as in the old times, it now means to lose the customer’s entire license revenue and the corresponding upside potential!
3. So, in order to capture the SaaS effect, software vendors need to focus on revenues and not new bookings anymore. New bookings (=order income) are not that relevant anymore because they can either be much lower than the revenue if there is no or only a small revenue base level agreed. Or they can be much higher than the revenue if, as usual in SaaS contracts, a multi-year contract with a revenue base level is agreed.
Managing a start-up company by revenue instead of bookings is a big challenge that comes with SaaS. Finance and accounting can be quite complex, even in the early stage of a start-up. Sales incentives and commission plans should be based on annual revenues (or quarterly if you are public and/or US-based) and not new bookings or revenues from new orders. And, strong marketing support for your customers and partners is necessary from the beginning, which – due to lack of your own market experience with your new product – requires quite some anticipation.