TWIS #12

TWIS Events

I’m delivering a Seminar in London on Friday- How to optimise your SaaS revenue streams at the Rackspace SaaS and the Cloud 2010 event.

There’s going to be a fantastic VC panel discussion afterwards, including Ivan Farneti and Saul Klein from Seedcamp/Index.

It’s free and there are a limited number of places left! If you’re in the UK- it would be criminal to miss it… ;)

My Interview with Lincoln has been my most popular post ever. I don’t normally promote webinars but he’s doing one next week on “Making channels work to grow your SaaS business“. It’ll be good.

TWIS#12

I’m sat here embarking on TWIS #12 with a bout of man flu and 400 unread posts in my feed reader :(

Update- I’m down to 26- here goes…

Too often I think as an industry, we focus on the obvious benefits of SaaS- as outlined by Ray:

  1. Richer user experience – SaaS apps bring Web 2.0 usability to the enterprise world through rich internet applications using Adobe Air, HTML 5, Microsoft Silverlight, and other tools.
  2. Rapid implementation – SaaS applications focus on configuration and integration, not hard core implementation.  Users can be up in weeks, not months.
  3. Frequent cycles of innovation - At present, most vendors introduce new functionality, enhancements, and bug fixes on frequent refresh cycles.  Some vendors provide as frequent as weekly updates, others – seasonal.
  4. Minimal upgrade hassles – Users focus on minimal testing scenarios and receive updates all at once.  In applications with significant regulatory and tax updates, SaaS applications reduce the cost of compliance by as much as 77%.
  5. Always on deployment – Organizations can expect average up-time levels at 99.95% or higher for most applications.  These results often exceed existing on-premise performance.
  6. Subscription pricing – Subscription pricing reduces the capital burden of common on-premise payment models.
  7. Scalability – Organizations can add or subtract users as needed without worrying about procuring new hardware and other infrastructure.

Yet the real value in SaaS is not any of the above when compared to legacy software, but the network effects generated by having multi-tenant systems. Ray Goes on:

…Yet, Aggregated Information Provides The Differentiated Value To Clients

Despite the obvious benefits with SaaS deployments, three hidden advantages will emerge with market maturity:

  • Benchmarking. SaaS vendors sit on a tremendous treasure trove of data.  Participating organizations could opt-in to share secure and masked information for the purposes of business optimization.
  • Trending. Organizations could also opt-in to identify larger market trends.  Trending information could be used to help organizations with planning.
  • Prediction. More sophisticated organizations will take SaaS vendor trending data and design new algorithms to support predictive analytics.  The richness and consistency of the data set will improve accuracy.

The Bottom Line For SaaS Vendors – Create Additional Value As An Information Broker

The end game for SaaS vendors may not be a re-creation of the on-premise world in the Cloud.  In fact, those vendors with a true multi-tenant SaaS model may turn out to find additional revenue streams as information brokers.  Expect demand for premium information-on-demand services to begin with benchmarking and evolve to prediction.  For example, imagine the benefits gained by organizations who consume the latest buying behavior data from their CRM vendors.  Organizations could turn to HCM vendors for geographical salary or hiring trends.  Customers of financial vendors could better predict credit risk factors.  A key requirement – customers must trust their SaaS vendor’s data ownership and privacy policies before the industry makes this transformation.  With acceptance, vendors will have more reasons to move to a SaaS offense.

I’d add another critical part- Ecosystem.

Without an ecosystem of developers, innovating and adding value to your platform, you’re stuck pulling the proverbial cart on your own.

Think about it in simple terms- would the iPhone be half as successful had it not been for apps? What about Salesforce- the only reason I’d choose Salesforce over another CRM platform is that there are more apps available for Salesforce than any other CRM platform I know.

I’m delivering some of Lincoln’s content next Friday @ Rackspace and he articulates this better than anyone in his 7 revenue streams:

7 Revenue Streams by Lincoln Murphy

The network effect glues together the SaaS Business Architecture and delivers the real benefits of SaaS. Without multi-tenancy, you can’t have any of that benefit- but that’s an argument for another day…

So while thinking about the seminar- I came across this post by Ray on transitioning to SaaS:

On-premise vendors still see SaaS as a loss leader due to huge ramp up and punishing revenue recognition rules
Most non-SaaS software vendors just want SaaS to go away. A shift to SaaS requires plenty of work with minimal return – not to mention the destruction of the current business model. In conversations with 61 vendors and building off of SaaS evangelist Jeffrey Kaplan’s post (July 2, 2009, Seeking Alpha – “From the Vendor’s Point of View: Why SaaS Sucks”), vendors who have made this transition or have started the investment put in heavy lifting in these activities must:

  • Re-architect apps
  • Find balance between configuration and optimization of SaaS platform
  • Design product road map and rollout strategy
  • Determine SLAs
  • Identify a hosting strategy
  • Craft pricing and licensing policies
  • Harmonize SaaS pricing with On-premise and other models
  • Create go to market strategy
  • Alleviate channel conflict with partners, resellers, distributors

After all this work to be ready for SaaS deployments, vendors also discover that FASB SOP 97-2 software revenue recognition rules prohibit them from immediately recognizing multi-year contracts. Even worse, subscription revenue can only be recognized on a month-to-month basis – leading to a long road to profitability. In fact, vendors such as Lawson, estimated a 7 to 10 year break even period for a full SaaS model. No wonder Harry Debes was fired up on how SaaS could be a fad in his interview with Victoria Ho at ZDNet last year. In private, most software executives also echo such sentiments and wholeheartedly agree with his comments about the business model challenges.

And yet, we are where we are, SaaS and Cloud is becoming the de-facto choice for applications for the very benefits out lined above. There are still some significant challenges to address in 2010, as VC Evangelous  Simoudis outlines, but the tide is definitely turning and buyers are giving vendors no choice but to have a SaaS offering if they want to remain in business.

There was some uproar about the recent Gartner prediction that 20% of companies will be serverless. Appirio covered it nicely this week:

Its not really a question of IF businesses will become serverless, it is a question of WHEN. Today, if you are a start-up, there is no reason why you should buy servers, set up a datacenter or incur any type of capital expenditure in setting up your basic infrastructure. But for larger organizations, the question is how to build a business-case driven roadmap to get to that same end-state?

Our findings with early customers show that the benefits of moving to the cloud accelerate as more IT is moved to the cloud. Moving 100% of your IT infrastructure to the cloud creates 5-10x the benefits of just moving 50% of your infrastructure to the cloud. Entire categories of spend go away – no more VPN, Firewall, DMZ costs, no more rack space to build/rent, no more datacenter power and cooling costs. Gartner IT Spend and Staffing benchmarks (2009) indicate that a typical services organization spends 5.8% of their revenue on IT. Of that, nearly 18% of IT spend is on hardware. When you move 100% to the cloud, the hardware spend will drop practically to zero. Even after increased spend on cloud subscriptions, this frees up nearly 1% of your revenue for more strategic and innovative programs.

Compelling stuff.

Salesforce released their visual process manager this week- is the end of custom software nigh?

Force.com, company’s platform to build and deploy enterprise applications, will now allows companies to design and deploy business processes inside their apps without having to build the applications on other software. Customers can visually design any complex business process with a design tool and instantly run it in the cloud without writing a single line of code.

Said Techcrunch. Jeff Kaplan commented on his blog:

PaaS solutions may never be able to match the level of customization of legacy applications. However, that isn’t necessarily a bad thing given the black-hole that many enteprises have faced trying to customize traditional enterprise apps to meet their unique needs. This has often been an endless and costly chore for most organizations which has seldom met their corporate objectives. Instead, it has resulted in many organizations being unable to adopt the latest software updates and upgrades from their vendors.

Rather than employ an army of consultants to customize traditional applications, Force.com Visual Process Manager promises to give corporate end-users the ability to create and implement business process-oriented applications which can achieve greater utilization in a shorter time-to-value.

If I were still a VAR, I would be thinking really hard how I could get into that game…

A couple of extra thoughts- if you’re wondering how to gain additional competitive advantage- I thought this post by Anthony Tjan in the HBR was excellent:

While there are obvious ways to gain significant customer understanding, such as surveys and focus groups, some of the most interesting insights come from less direct analyses.

Take our three-minute rule as an example. You can learn a great deal about customers by studying the broader context in which they use your product or service.

To do this, ask what your customer is doing three minutes immediately before and three minutes after he uses your product or service. At Thomson, one of our products provided investment analysts with financial earnings data.

What we hadn’t fully appreciated — until we applied the three-minute rule — was that immediately after getting our data, a large number of analysts were painstakingly importing it into Excel and reformatting it. This observation led us to prioritize developing a more seamless Excel plug-in feature with enhanced formatting capability over other product development initiatives. The result was an almost immediate and very significant uplift in sales.

What are your customers and prospects doing before and after?

Ron Arden correctly pointed out that Google could soon have their own tablet- some of their vision here:

Googles vision for Android tablet

In other news:

I hope you’ve had a brilliant week- remember- I’m still available for hire ;)

Have a great weekend.

Justin

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  • http://twitter.com/MichaelDunham MichaelDunham

    All the best in your new gig – Sounds like an exciting opportunity. Anything I can do t0 help I'm always available.

    When you up to talk about some of this on a podcast … :-)

  • http://www.justinpirie.com Justin Pirie

    Thanks mate- I was thinking about getting you on a podcast ;)

  • http://www.facebook.com/people/Sung-Jin-Kim/100000773058162 Sung-Jin Kim

    “The Moving Cloud: To surpass or To be followed?”

  • http://www.justinpirie.com Justin Pirie

    Sung-Jim: what do you mean?

  • http://www.facebook.com/samarpan Samarpan Dutta

    @justinpirie Great post! liked the way you put the #multitenancy debate to rest. See how #Cordys takes multitenacy seriously http://bit.ly/9mYXpk

  • http://www.justinpirie.com Justin Pirie
  • http://www.opteso.co.nz Pete Clouston

    Hi Justin,

    re: SaaS ROI -
    can you offer ideas as to potential methodologies for quantifying the return, objective and subjective?

    Thanks, Pete

  • http://twitter.com/janawiggins Jana Wiggins

    Priceless!

  • http://giffconstable.com giffc

    Thank you for the kind words Justin! You remind me I really need to go look at Meeker's latest deck. Hope you're having fun with the new gig

  • http://www.justinpirie.com Justin Pirie

    Hi Pete – I'll try and lay out some of the key ROI arguments out this afternoon.

    Best

    Justin

  • http://www.justinpirie.com Justin Pirie

    Thanks!

  • Aaron

    Interesting – especially the mobile SaaS predictions.

  • http://twitter.com/daveconcannon Dave Concannon

    Thanks for the mention Justin, glad you found it useful.

  • http://www.justinpirie.com Justin Pirie

    My pleasure Dave- great post- not often discussed!

  • http://www.growcomms.com/ Russell Palmer

    Justin,
    very thorough round up of the industry happenenings this week. I especially enjoyed the interview with Eric Domage on cloud security aspects. My eyes usually glaze over when the topic of security comes up because I find it very technical, but Eric put his points forward in a way that is easy to understand and make a lot of sense.

  • http://www.justinpirie.com Justin Pirie

    Eric is really good. Security for the rest of us in the real world!

  • Anonymous

    Interesting The examples show high CAC costs (referred to d.skoks) for an SaaS but what do you recommend doing if a startup’s CAC is high due to x reason a direct sales force for example? Aside from the above mentioned within the examples on how to drive CAC down or LTV upnnWhat would you or anyone following advise or strategically adjust to obtain the same objectives ( sales/rev etc) there needs to be some constructive comments around these half examples, for instance recommending not using a direct sales force is not really constructive because it might deter away from the sales/rev objectives, but a strategy, substitution to lower the CAC associated with the force could be something we could all discuss and benefit from

  • kennsaa

    Interesting The examples show high CAC costs (referred to d.skoks) for an SaaS but what do you recommend doing if a startup’s CAC is high due to x reason a direct sales force for example? Aside from the above mentioned within the examples on how to drive CAC down or LTV up

    What would you or anyone following advise or strategically adjust to obtain the same objectives ( sales/rev etc) there needs to be some constructive comments around these half examples, for instance recommending not using a direct sales force is not really constructive because it might deter away from the sales/rev objectives, but a strategy, substitution to lower the CAC associated with the force could be something we could all discuss and benefit from

  • http://www.justinpirie.com Justin Pirie

    Have you checked out TWIS#26?nn http://www.justinpirie.com/2010/05/twis26-this-could-change-your-life-understanding-sales-complexity-in-saas/ nnThe first question to ask- is there enough pain (value) to justify the high selling point of a direct sales force?nnIf there’s not- then you might need to reconsider… I’ve had this question posed so many times over the years- so I don’t wish to take assumptions based on your email- but they hint at the same underlying issues.nnSaaS is really an upside down business, distribution and user experience are much more important than the software. If you can’t nail those two- then you’re going to struggle to acquire customers…nnMarketing and Sales is almost more important than anything else

  • http://www.justinpirie.com Justin Pirie

    Have you checked out TWIS#26?

    http://www.justinpirie.com/2010/05/twis26-this-could-change-your-life-understanding-sales-complexity-in-saas/

    The first question to ask- is there enough pain (value) to justify the high selling point of a direct sales force?

    If there’s not- then you might need to reconsider… I’ve had this question posed so many times over the years- so I don’t wish to take assumptions based on your email- but they hint at the same underlying issues.

    SaaS is really an upside down business, distribution and user experience are much more important than the software. If you can’t nail those two- then you’re going to struggle to acquire customers…

    Marketing and Sales is almost more important than anything else

  • DCowan

    Excellent blog Justin, very insightful. I think your 10 point plan is exactly what Partners should be doing. The GB Olympic committee did something similar about 6 years ago, taking someone else’s model (business plan/services/product – it applies across the board I think), in this case Australia’s, and put their own spin on it to offer their athletes (customers) a better chance of succeeding, fast forward 4 years to Beijing 2008 and GB surged past Australia in the Gold Medals department and now they look to GB as a model to follow despite it being an upgraded version of their own idea!nPartners can certainly retain their clients with a smart implementation of some or all of your points……. as you say, it’s not all doom and gloom!

  • DCowan

    Excellent blog Justin, very insightful. I think your 10 point plan is exactly what Partners should be doing. The GB Olympic committee did something similar about 6 years ago, taking someone else’s model (business plan/services/product – it applies across the board I think), in this case Australia’s, and put their own spin on it to offer their athletes (customers) a better chance of succeeding, fast forward 4 years to Beijing 2008 and GB surged past Australia in the Gold Medals department and now they look to GB as a model to follow despite it being an upgraded version of their own idea!
    Partners can certainly retain their clients with a smart implementation of some or all of your points……. as you say, it’s not all doom and gloom!

  • http://www.justinpirie.com Justin Pirie

    That’s a really interesting perspective. I didn’t know about that parallel.

  • http://www.justinpirie.com Justin Pirie

    That’s a really interesting perspective. I didn’t know about that parallel.

  • http://www.commensus.com/Cloud-Services/Hosting-and-Virtualisation/Cloud-Hosting-Virtual-Server-Hosting Virtual Server Hosting

    They also need to marketing Cloud as an aid for business strategy rather than the strength of their services which are too difficult for a financial director to comprehend

  • http://www.commensus.com/Cloud-Services/Hosting-and-Virtualisation/Cloud-Hosting-Virtual-Server-Hosting Virtual Server Hosting

    They also need to marketing Cloud as an aid for business strategy rather than the strength of their services which are too difficult for a financial director to comprehend

  • http://www.justinpirie.com Justin Pirie

    Can you expand on that? What do you mean by “business strategy”?

  • http://www.justinpirie.com Justin Pirie

    Can you expand on that? What do you mean by “business strategy”?

  • http://bit.ly/1Gu8Ha Firas Raouf

    Justin, I think you’re on the right track… I recently wrote about this topic on my blog http://bit.ly/fAkVpf, Here’s the intro to that post:nnThe reseller channel generally does not work for SaaS companies, especially at the early stages (sub-$20M in revenue). This is driven by two things: n1. SaaS solutions generally don’t require an intermediary. They are easy to find (online), easy to deploy (nothing to deploy), and easy to use. This is obviously not the case with SaaS solutions that require a significant process change on the customer’s side, but more on that below.n2. SaaS license revenue stream in the first year (where the reseller needs to make the most of his money) is a fraction of what perpetual license products receive. So the reseller either has to settle for a fraction of the revenue he expects from his perpetual license vendors, or he needs to get a cut of subsequent year subscriptions (which would be a waste of your money).nnThe only way to engage an indirect channel in an SaaS delivery model is around the professional services that need to encompass your solution. In effect, the only indirect channel I’ve seen work for SaaS companies is the value-added service provider partner. This is where a partner delivers the business process re-engineering required to successfully implement your solution at a customer site. In that case, the service provider derives his revenue from the services billed directly to the customer… while deriving less revenue from the SaaS license margin you would provide on top of that.nn

  • http://bit.ly/1Gu8Ha Firas Raouf

    Justin, I think you’re on the right track… I recently wrote about this topic on my blog http://bit.ly/fAkVpf, Here’s the intro to that post:

    The reseller channel generally does not work for SaaS companies, especially at the early stages (sub-$20M in revenue). This is driven by two things:
    1. SaaS solutions generally don’t require an intermediary. They are easy to find (online), easy to deploy (nothing to deploy), and easy to use. This is obviously not the case with SaaS solutions that require a significant process change on the customer’s side, but more on that below.
    2. SaaS license revenue stream in the first year (where the reseller needs to make the most of his money) is a fraction of what perpetual license products receive. So the reseller either has to settle for a fraction of the revenue he expects from his perpetual license vendors, or he needs to get a cut of subsequent year subscriptions (which would be a waste of your money).

    The only way to engage an indirect channel in an SaaS delivery model is around the professional services that need to encompass your solution. In effect, the only indirect channel I’ve seen work for SaaS companies is the value-added service provider partner. This is where a partner delivers the business process re-engineering required to successfully implement your solution at a customer site. In that case, the service provider derives his revenue from the services billed directly to the customer… while deriving less revenue from the SaaS license margin you would provide on top of that.

  • http://www.justinpirie.com Justin Pirie

    Great post Firas! I really like your thinking on channels.nnAs a counterpoint to your blog post, I would argue there are some cases where building a channel early can benefit, where I work we have a very successful channel model that started way before your suggested revenue target- but then the channel wanted to sell our type of solution. So the only exception to your rule is if the channel are actively seeking that product to sell, then I think it would be foolish to turn them away.nnHowever, I don’t think that’s a normal use case… The majority of SaaS apps are disruptive and are taking complexity away from the end user, an as such don’t need as many services to install and maintain. Being disruptive isn’t always a good thing if you want to build a channel…nnBut in essence you’re right, if you want a channel, you need to create what I call “channel pull”. Essentially you have to create direct demand in the marketplace before channel will start selling. If you don’t do that, the channel won’t sell anything…nnAnd your remarks on what it takes to make a successful channel work are absolutely spot on. We have a dedicated channel team supporting them.nnIn essence- from a SaaS vendor perspective, building a channel is not something that should be taken lightly. For me- “we’ll create a channel” should go in the same bucket as “it’ll go viral”…

  • http://www.justinpirie.com Justin Pirie

    Great post Firas! I really like your thinking on channels.

    As a counterpoint to your blog post, I would argue there are some cases where building a channel early can benefit, where I work we have a very successful channel model that started way before your suggested revenue target- but then the channel wanted to sell our type of solution. So the only exception to your rule is if the channel are actively seeking that product to sell, then I think it would be foolish to turn them away.

    However, I don’t think that’s a normal use case… The majority of SaaS apps are disruptive and are taking complexity away from the end user, an as such don’t need as many services to install and maintain. Being disruptive isn’t always a good thing if you want to build a channel…

    But in essence you’re right, if you want a channel, you need to create what I call “channel pull”. Essentially you have to create direct demand in the marketplace before channel will start selling. If you don’t do that, the channel won’t sell anything…

    And your remarks on what it takes to make a successful channel work are absolutely spot on. We have a dedicated channel team supporting them.

    In essence- from a SaaS vendor perspective, building a channel is not something that should be taken lightly. For me- “we’ll create a channel” should go in the same bucket as “it’ll go viral”…

  • http://bit.ly/1Gu8Ha Firas Raouf

    Justin, I think you and I are on the exact same page. I would love to bring our combined thoughts together into an article that we can post on our community site http://www.OpenViewLabs.com We’re always looking for SaaS thought leaders to contribute.

  • http://bit.ly/1Gu8Ha Firas Raouf

    Justin, I think you and I are on the exact same page. I would love to bring our combined thoughts together into an article that we can post on our community site http://www.OpenViewLabs.com We’re always looking for SaaS thought leaders to contribute.

  • http://www.justinpirie.com Justin Pirie

    Thanks- that sounds great! I’ve got a call with Corey today- so I’ll mention it to her ;)nnJustin

  • http://www.justinpirie.com Justin Pirie

    Thanks- that sounds great! I’ve got a call with Corey today- so I’ll mention it to her ;)

    Justin

  • http://twitter.com/ITLab_JasonC Jason Currill

    Distribution is dead – data residency makes it breath again! discuss?

  • http://twitter.com/ITLab_JasonC Jason Currill

    Distribution is dead – data residency makes it breath again! discuss?

  • Robert

    Any update on this? u00a0Have OneLogin fixed your issues? u00a0

  • Robert

    Any update on this?  Have OneLogin fixed your issues?  

  • http://www.justinpirie.com Justin Pirie

    Hi RobertnnWhat issues are you referring to- the ones in the review?nnJP

  • http://www.justinpirie.com Justin Pirie

    Hi Robert

    What issues are you referring to- the ones in the review?

    JP

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  • msurkan

    I completely agree with Justin’s comment that “The good times, as we knew it in the IT channel are gone.” In fact, I would go so far as to say that the entire “channel” itself is in the process of becoming extinct. Most resellers were little more than order takers in the first place and in the world of SaaS there is little for them to do. The channel is just the latest link in the chain to be eliminated by the disintermediation of the Internet.