TWIS #12

2010 February 5
tags: , , , , , , ,
by Justin Pirie

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

from → SaaS, TWIS

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