ServiceSource is a leader in an emerging field called Service Revenue Management, which for most technology companies refers to management of their ongoing subscription maintenance streams.  The company offers a technology platform and a suite of applications, as well as a managed services capability for some of their largest technology customers.  Some of their recognizable customers include Adobe, Cisco WebEx, NetApp and Xactly.  Montclair Advisors did a Smart SaaS Business Profile on ServiceSource in 2011 that provides background on the company, their strategy and product portfolio.

Last week I visited the ServiceSource offices in San Francisco to get a sneak peak of their new Avalon platform. Avalon is ServiceSource’s next generation SaaS platform that will pull together multiple capabilities including a beautiful new user experience, integration services with other leading Cloud platforms, a connected ecosystem of ServiceSource managed services and their continuous intelligence capability.

I was very impressed by their new user interface, its very clean and uses info-graphics metaphors along with in-line analytics to create a very easy-to-use, and understand product.  The graphics were elegant and provided a lot of drill down and mouse over information for the user.  Because ServiceSource is using HTML5, this interface is available on mobile devices as well as through a standard web browser.  The charts and graphs are all available inside of the product, which makes it easier to use than other CRM-like systems. The design point was to create a system that offers a walk-up interface, one that required little or no training for the users.  Here’s a screen shot of the new user interface.

Another unique aspect to the product is that there is a near real-time data warehouse that feeds the analytics for Avalon.  For example, when their customers are comparing their renewal rates against the industry or even their peer group, they will be looking at really fresh data.  It is common for most aggregated data of this type to be compiled and delivered in a quarterly or in some cases a monthly basis. So this continuous intelligence capability may deliver a competitive edge to ServiceSource customers because the information is representing how the company is operating right now. For most SaaS companies, it is difficult to gather service revenue-related data about their business on a continual basis but with this aspect of the ServiceSource Avalon product, it will make it really straightforward because it will be delivered through easy-to-use metrics and dashboards.

ServiceSource is using a very modern Cloud infrastructure for their Avalon platform.  The infrastructure is build on Node.js and Amazon Web Services, which is interesting because I haven’t seen a lot of enterprise software vendors building their next generation platform on the Amazon infrastructure.  There are clearly some scalability and elasticity advantages to using the AWS platform for a SaaS offering and ServiceSource is using many of these capabilities.  The company also has a strong Avalon development team with some ex-Coghead alumni leading the efforts.

With their new user interface and the flexibility they are building into their SaaS platform, it may be very easy for the company to allow their customers and prospects to ‘try before they buy’ new software modules and capabilities.  I believe that this inherent flexibility, for this type of application suite, should really increase user adoption and consumption levels, which should help ServiceSource continue to renew their customers and sell them additional products and managed services.

The Avalon service will be generally available later in 2012.

At Montclair Advisors I work with many different types and sizes of software firms that are jumping into the SaaS business model for the first time.   Here are a few tips that I would tell a new client who is looking to get into the SaaS business in 2012.

Think “Whole Product”

A SaaS offering is more than just software, it is also the services to get the product up and running, training, support, the infrastructure and security.

For most SaaS firms, they really view their platform as synonymous with their company’s overall brand, which includes more than just the technology. This brand promise is a product experience that is smooth and consistent. It also takes into account issues like business continuity and being able to quickly restore systems and data after an outage. This also means that SaaS offerings must understand and how to properly manage security and compliance concerns for large, complex customers.  In some cases this promise needs to do a high level of monitoring and even anticipate and correct problems before they occur.

When considering the professional service component of a SaaS offering, there should be extra focus on efficient provisioning and on-boarding of new customers. It is important to make this initial experience quick and easy in order to improve the customer’s overall time-to-value. By combining many customer-facing functions like support, training and service into a Customer Success team is also another popular way of trying to deliver a positive ‘whole’ product experience.

Focus on Adoption and Consumption

The economics of SaaS requires both a high rate of new customer sales combined with a better than 90% renewal rate for the financial model to work. The trick that the really fast growing SaaS firms have discovered is that up-selling additional capacity and cross-selling new products not only increases top line revenues but also improves overall Customer Acquisition Costs (CAC) and business margins.

The objective in any software company should always be to build a satisfied customer-base, but in the SaaS model you can’t stop there, it is important get customers to actively use and adoption the product. When a product is easy-to-use, intuitive, being used every day, and built on a solid platform, then it can become viral. Viral products like DropBox, Yammer and Salesforce.com’s Chatter can throw off high marginal add-on sales, that can boost a SaaS company’s revenues very quickly. This type of product consumption is important for all SaaS company’s even if the use of their product may never go viral.

It’s All About Growth

Many new SaaS firms spend a lot of time and capital building out their products, which makes sense. Often they underestimate the amount of effort and focus required to build a high growth sales and marketing machine. Because it is hard initially to jump start the recurring revenue model, it is important to develop a highly productive sales methodology, usually based on a ‘land and expand’ approach. For the most successful SaaS companies (SuccessFactors, Salesforce.com, Workday), an aggressive Compound Annual Growth Rate (CAGR) is imperative to building a profitable company.  Many of these firms, even though they are large, are still growing at 30-50% per year.

In order to build this sales and marketing engine, it requires a meaningful investment in lead generation, a sales organization that separates hunters from farmers and has a set of metrics that are tracked at least weekly. For ISV’s that are moving to a SaaS model, don’t co-mingle the SaaS and non-SaaS sales teams. Each sales team should be very focused on selling a single type of product or a single function. For example, having a SaaS team that focuses on selling only new SaaS deals, another is only doing renewals or up-selling.

Because products and markets are different, it is important to constantly be testing lead generation, pricing, packaging and sales processes in order to find the best one that works for your business. If something doesn’t work, stop doing it, and pivot to another idea. The best SaaS companies are always testing and trying to improve their revenue generation processes.

Optimize Cost of Goods Sold

Most SaaS executives are focused on their COGS and how best to optimize them. This is why many early SaaS firms use free open source software and Infrastructure-as-a-Service providers to build out their platforms, or outsource components of their business to partners to save money. The best way to optimize COGS is to reduce the number of people required to on-board, provision and operate your SaaS platform. It is better to automate as many of your processes as possible, which not only saves precious capital, but also can often improve the overall scalability of the business.

One the best examples of this type of automation is with the popular commercial SaaS storage solution DropBox [Check out this video]. They have built a service that is easy to use, self-provisioning and needs no human intervention. This is why they were able to on-board 40 million new customers during the last 12 months with a net increase of only 7 people across their entire company! This is where SaaS companies can become very profitable and grow very quickly.

Another area that can really impact COGS is related to the 30-day trials associated with most SaaS software. Without a scalable platform that has a sufficient level of automation, the launching, management, tear down and re-provisioning of resources will all be done by an ever growing team of professional services or IT professionals. Best practice is to leverage a multi-tenant platform and automate everything possible.

Strive for Independence

For ISV’s who are either transitioning to or launching a new SaaS offering, it is important to seriously consider keeping the new SaaS organization separate from the main business. I have seen many ‘shared service’ models where different groups share sales, operations, demand generation, services and even support and they experience a lot of challenges. The SaaS business model in many ways is unique and conflicts with most traditional software business practices.

For example, professional services in most software companies is a revenue-center and they are always looking for ways to generate additional projects and revenue. At a SaaS company, the professional services team is doing the opposite.  A SaaS services team is trying to minimize their level of involvement with the customer, and the less services involved in setting up a SaaS product, the better. This would be a difficult group to manage if you have both a revenue quota and are also trying to minimize revenue associated with SaaS accounts.

The other reason I often recommend creating an independent group for transitioning ISV’s is that the overall rate and pace of SaaS companies is quite different than traditional software firms. SaaS firms develop products more quickly, sales processes are faster, deployments are more rapid and this mismatch in speed creates a lot of stress when traditional ISVs try to adopt this rate and pace.

It is also important to continue the care and feeding of the core business and realize that is also a critical success factor. By allowing this type of co-existence you can move at the right rate and pace, while continuing to build and run your core business.

There are many other tips and tricks to starting your SaaS business.  Feel free to email me at kevin@montclairadvisors.com and I have some other materials that can be helpful for those who are new to the SaaS model.

As it turned out I was right about 50% of my predictions last year, so here’s my educated guesses for what is going to happen to the SaaS market in 2012:

#10  Oracle will buy Netsuite.

I know this isn’t much of a surprise since Larry Ellison owns approximately 65% of Netsuite, but with the RightNow acquisition, this type of move makes more sense as part of coordinated Cloud acquisition strategy.

#9  SaaS IPO window remains open.

There are a number of SaaS firms who have either filed, like Eloqua, or are seriously considering going public in 2012, like Workday, Dropbox, Box, and Guidewire.  This window can be opened even wider by successful IPO’s from companies like Yelp and Facebook.  The only problem is that there are over 100 companies who have already filed to go public in 2012, so it might be difficult for smaller SaaS firms to do their IPO.

#8. Master brands will continue to chase SaaS offerings.

IBM just purchased DemandTec and SAP bought SuccessFactors, while Oracle bought RightNow.  This is a big change from 2010 when most of these companies were not interested in the Cloud or SaaS.  All of these master brands have tried to build their own SaaS businesses, but I think they have now finally realized that SaaS is a business model, not just new technology.  The smart firms will keep their SaaS businesses and their core license businesses separate and not try and merge them.  Good luck.

#7. Workday will have a monster IPO.

There is no doubt that the 2012 IPO of Facebook will set all sorts of records but for enterprise software, I think Workday will be one of the biggest on record.  The company just took in $85 million in funding over the past few months, in what was termed an IPO preview round. Workday could raise as much as $500 million in an IPO, which would force the big ERP players to start building out their SaaS businesses as a defensive strategy at the bare minimum.

#6. SaaS starts to go global.

I was involved in an Oracle SaaS webinar a couple of weeks ago for an audience in Europe and the response was really impressive.  I initially thought that most of the registrants would be from the UK, the Netherlands, Germany and Scandinavia.  Actually there were attendees from almost every country in Europe.  I have also started to hear about strong SaaS interest in Australia, New Zealand, Brazil, Japan, China and many other countries.  2012 will just continue to build on the SaaS market’s growing global momentum.

#5. Salesforce continues to expand beyond CRM.

During 2011 Salesforce purchased several firms that added new capabilities to their platform including DimDim (collaboration), Radian6 (social analytics), Model Metrics (mobility) and then they bought Rypple in December, which launched them into the Human Capital market.  I predict that Salesforce will add several other HCM tuck-in acquisitions (JobScience, Jobvite), financial applications (FinancialForce, Zuora), or even supply chain management (Glovia OM, Kenandy).

#4. IT Management and Security SaaS offerings emerge.

Companies like CA have been successful in launching their new Nimsoft ITM SaaS offering during 2011, but there are also many other firms that are beginning to gain momentum with their new SaaS offerings as well. This is a very big market opportunity to replace existing legacy infrastructure and security offerings. Companies to watch include Service-Now, Trustwave, Splunk, PingIdentity and Proofpoint.

(Note: CA/Nimsoft and PingIdentity are Montclair Advisors clients)

#3. SaaS continues to be social.

With Jive going public during December 2011, they are just the most recent example of SaaS social applications gaining market acceptance.  Salesforce has been very successful with their Chatter and Radian6 offerings.  Independents like Yammer, SocialCast, Lithium and CentralDesktop will continue to see increased demand for their social/collaboration platforms.

#2. More big VC rounds for SaaS firms.

2012 will continue to see VC’s put a lot of money to work with leading SaaS companies.  We saw some major investments during 2011 including Box ($81 million), Dropbox ($250 million), HubSpot ($32 million), Marketo ($50 million), Workday ($85 million) and Zuora ($35 million).  This trend will continue in 2012 and companies will be putting a lot of money to work to build out their platforms and distribution capabilities.

#1. Storage is a major story for 2012.

As more and more data is stored in the Cloud, consumers and businesses are looking to all different types of on-line storage services.  During the year that Apple launched its iCloud small business and music storage service, we also saw major funding rounds for SaaS companies including Dropbox and Box.  We even saw a new IPO from Carbonite that provides a small business/consumer Cloud back-up service.  This is definitely a segment of the SaaS market to keep an eye on in 2012.

Company:          Eloqua
Started:             1999
Located:            Vienna, Virginia
Geography:       Global
Market:              Revenue Performance Management
Products:         Marketing Automation platform and Revenue Performance Management applications that help growing businesses align their sales and marketing teams, identify and nurture revenue opportunities and measure marketing and sales effectiveness

Customers:       Adobe, AON, Dow Jones, ADP, Fidelity, Polycom, and National Instruments.
Website:           Eloqua
Blog:                It’s All About Revenue
Twitter:             @Eloqua

Recent News:

Eloqua’s Social Media ProBook Takes Home the Gold

Citrix GoToWebinar Integrates With Eloqua AppCloud

Innovative, Revenue-Focused Marketers Recognized at Eloqua’s Fifth Annual Markie Awards

Eloqua Creates “All-in-One” Marketing Automation Resource Hub with New “Business Center” Portal

Over the past few months SaaS companies have continued to announce very large funding rounds as they are demonstrating the power of their subscription-based business platforms. Many of these firms are deciding to do large private rounds before filing to go public. Here is a quick round-up of some of these firms:

The company has raised an amazing series B round of $250 million. Dropbox is the Cloud storage company that is very popular with mobile phone and iPad users. They have about 70 employees and have secured more than 40 million customers in the past 12 months. This round put the company’s market valuation at close to $4 billion. This is probably the largest B round we have seen and may have been done as an alternative to doing an IPO.  Sounds like a Facebook type of story because like Mark Zuckerberg turned down a significant acquisition offer from Google, and apparently the DropBox founders, Drew Houston and Arash Ferdowsi, turned down a nine-figure offer from Apple in 2009.

Workday or “PeopleSoft 2.0″, has been making consistent progress towards a 2012 IPO and announced at their recent Workday Rising conference in October that they had just closed an $85 million dollar round of funding. Like Dropbox, Workday has now raised about $250 million. With this lastest round, the company is now valued at $2 billion. What was interesting is that unlike most private fundings, which are usually led by venture capital firms, this round was lead almost exclusively by institutional investors like T. Rowe Price, Morgan Stanley, Janus and Fidelity. As co-CEO Aneel Bhusri put it “In some ways, it’s an early debut of an IPO.” Workday claims they are on track to do about $320 bookings during 2011, which is more than 100% CAGR from 2010.

Another major Cloud storage company, Box.net, resisted a $600 million dollar offer from Citrix and just closed an $81 million round with Bessemer Venture Partners, NEA, Salesforce.com and SAP and existing investors Draper Fisher Jurvetson and Andreesen Horowitz. After this round the company’s valuation is $600 million. The company has about 7 million users and is leveraging a very successful ‘freemium’ go-to-market model.

With competitor Eloqua already in IPO registration to raise $100 million for their Revenue Performance Management (RPM) platform business, Marketo isn’t far behind. The company announced last week that they had just raised another $50 million in a round led by Battery Ventures along with Institutional Venture Partners, InterWest, Mayfield Fund and Storm Ventures. Marketo’s estimated size of around $15 million in in 2010, should double in 2011, but they are probably a little small to do an IPO at this point. Obviously the venture community thinks this RPM area around marketing and revenue optimization for SaaS is quite hot right now.

As part of their IPO registration, Jive Software just raised another $40 million prior to their public offering. Sequoia Capital and Kleiner Perkins Caulfield & Byers purchased stock through preferred warrants. Jive is provides an enterprise social business platform. Currently the company is on a $80 million run-rate but still not profitable and has raised close to $100 million overall.

Enterprise subscription commerce and billing provider Zuora also announced a large round of funding last week. The company raised a Series D round of $35 million from Index Ventures, Greylock along with a personal investment from Workday co-CEO Dave Duffield and their existing investors. To date the company has now raised $82 million. Zuora plans to use these funds to aggressively expand their distribution activities internationally, specifically in Europe.

The common thread for all of these companies is that they have businesses that are growing rapidly and have built very scalable platforms. With the IPO window open, but the public markets are still uncertain, we will probably see more of these type of IPO-preview type of funding announcements as SaaS firms continue to gain momentum in the market.

For the SaaS world, Oracle’s OpenWorld has lately been all about hardware and the Exastack products. These offerings have limited appeal to all but the largest SaaS ISV’s.   The good news is that there were some new announcements though that were much more interesting for the SaaS community at last week’s Oracle OpenWorld in San Francisco.  Here is a quick summary of the news and drama:

Oracle Public Cloud

This was a welcome move by Oracle, to finally embrace their vision of the Cloud. Oracle is re-packaging many of their assets including the Exastack, Java, and the Oracle Database into a pay-as-you-go service, which should be appealing to smaller customers as well as ISV’s looking for an easier way to leverage Oracle technology.

The key theme that Larry Ellison [video] kept emphasizing was that the Oracle Public Cloud is standards-based and will allow a customer to port products they built on their Cloud to other standards-based Clouds or even on-premise. Larry was quite funny in his keynote by referring to his competitor’s Clouds as the “Roach Motel of Clouds”, because once you go in, you never come out.

In addition to just pure infrastructure services, Oracle will also make available its applications including Fusion CRM and Fusion HCM products as their collaboration platform.

Here are some other interesting articles on the Oracle Public Cloud:

• Ellison Reveals Oracle’s Public Cloud; Calls Salesforce The ‘Roach Motel’ Of Cloud Services, Rip Empson, TechCrunch.
• How Oracle’s Public Cloud Is Different, Charles Babcock, InformationWeek.
• Oracle Public Cloud might be extensive, but it’s boring, Larry Dignan, ZDNet.

Oracle Social Network

Sounds a little like that movie about Facebook. The Oracle social strategy is to provide an easy-to-use interface for both their new Fusion applications as well as the Oracle Public Cloud.

Their social network looks remarkably similar to the Chatter offering from Salesforce.com. The Oracle Social Network allows you to track projects by activity streams, follow people and objects as well as standard collaboration inside the enterprise.  There is no social analytics capability similar to the Radian6 offering that Salesforce offers, but I think this is just version 1 of the Oracle Social Network.

This new collaboration tool will also be available on-premise as well as in the Cloud. The Oracle Social Network also provides an iPad front-end that should be appealing for mobile workforces

Fusion Application Suite – Now Ready

Last year there was a quiet announcement of the general availability of the Oracle Fusion applications. This year was much different with Larry Ellison announcing the full suite of Oracle Fusion apps and he even did a demo of their new Fusion CRM system (BTW he did a great demo).

Oracle spent six years to completely re-write all of the PeopleSoft, Siebel, Hyperion suites of applications and now there is a new generation of Fusion applications including;

• Fusion CRM
• Fusion Financials
• Fusion Governance, Risk and Compliance
• Fusion Human Capital Management
• Fusion Procurement
• Fusion Project Portfolio Management
• Fusion Supply Chain Management
• [Photos] Fusion Apps

The interfaces look modern and don’t appear to be warmed over client/server applications. Coupled with the Oracle Social Network, these products should be quite competitive in the SaaS market. All of the Fusion applications are available either on-premise, as a managed service and as a SaaS service through the Oracle Public Cloud. There weren’t a lot of details about this hybrid architecture and like the Oracle Public Cloud and Social Network, there will probably be more details early in 2012.

Salesforce – Occupy OpenWorld

As always, there is some great theater at OpenWorld when Oracle rescheduled Marc Benioff’s keynote to Thursday morning (the day the conference ended) and he went rogue. Salesforce quickly shifted the keynote to the hotel down the street. Montclair Advisors was right at the press conference but as it turned out it was basically the same Social Enterprise keynote that was delivered at Dreamforce.

A lot of kudos goes out to the Salesforce marketing team for being able to pull off such a solid event, including streaming the keynote speech over the Internet, in less than 24 hours. Talk about business agility!

Here are some pictures from the event and a few articles with more controversy:

• [Video] Marc Benioff’s rogue Oracle OpenWorld keynote.
• [Pictures] Montclair Advisors was at the rogue Salesforce press event, got some good shots.
• A Keynote Cancelled, A Database Dropped, Lauren Carlson, Software Advice.
• Benioff, Denied OpenWorld Keynote, Mounts Podium Anyway, Charles Babock, InformationWeek.
• Oracle OpenWorld snub fails to put off Salesforce CEO, Brid-Aine Parnell The Register.

The buying habits of software buyers over the past couple of years has really shifted. The way software was sold in the recent past was by promoting its revenue-producing benefits or the Return On Investment (ROI). This changed when the Great Recession hit the broader software market and buyers started thinking less about ROI and more about reducing or controlling their overall operational costs.

Between 2008-2009 this was a natural reaction by most businesses because their revenues began to dry up and they needed to reduce costs, payrolls and other investments in order to survive.   This was when SaaS all of sudden made a lot of sense to software buyers because:

• They could try the software before they bought it
• Pay for the software through a subscription, usually out of the company’s operating budget
• Only buy the software functionality they were going to use
• The SaaS provider paid for and managed all of the required infrastructure
• It was possible to get the software up and running very quickly

Depending on who you listen to, things are either recovering slowly, or we are slipping back into a recession. It can be argued that for most software companies, if you are selling a SaaS-based solution then it shouldn’t affect your business very much. In fact, as the economy gets tighter for buyers, SaaS solutions even make more sense for forward thinking businesses who are focusing on innovation and cost controls.

During the Great Recession we saw that traditional software companies experienced a net decline in their revenues and in some cases their revenues went down by nearly 50% year-over-year between 2008-2010. In big part this was because traditional software customers no longer had available the necessary capital dollars to spend on their perpetual license-based products and the banks were no longer lending.

These traditional software companies had also hastened their revenue decline by raising their annual maintenance rates, which put more pricing pressure on their customers at a time when they could least afford it. So their customers started taking a hard look at SaaS solutions as potential alternatives to traditional on-premise software.

Recession Accelerates SaaS Adoption

It wasn’t that SaaS solutions hadn’t been around for many years, it was that for many large software buyers, they hadn’t felt comfortable with software that was being managed by another companies. There were a lot of questions: Where was their data being housed, was it safe, what if they can’t handle our requirements? These were legitimate questions but many SaaS value propositions began to win over these large, skeptical customers:

• You could try their software before you buy it
• Get can get this software up and running quickly
• Only buy the functionality that you need
• If you don’t like their software, for any reason, cancel your subscription
• The software’s performance and availability is guaranteed
• Pay though a subscription, a big lump sum payment is not required
• No more upgrades, this type of software is always current
• Less or even no staff required to manage their software
• Lower total cost of ownership

These types of on-line solutions started resonating not only with the small and medium-sized company buyer but also with the very large, global enterprises as well. Over the last couple of years we have seen well-known organizations like Siemens, Walmart, Flextronics, Thomson Reuters and even the US government adopt SaaS and Cloud-based solutions.

It’s About Innovation Not Reducing Costs

Businesses during the last recession were primarily trying to reduce costs, which resulted in large scale layoffs. These firms were trying to ‘do more with less’.  This was the reason that many of these companies continued to buy software because they not only wanted to streamline operations, but also they needed to continue to innovate their business.

By deploying the latest in software technology, these innovative companies are looking to move into new markets, provide state-of-the-art tools to their employees, and optimize their supply chains.   This required them to get smarter about their businesses, markets and competitors, and solutions like SaaS-based business intelligence products were also really in high demand.  Given the flexibility and affordability of SaaS products compared to their on-premise predecessors, it is no wonder that most SaaS companies grew at more than 30% year-over-year even during the worst part of the recession.

There are SaaS solutions for almost every enterprise need including ERP, Financials, CRM, Marketing, Human Resources, Talent Management and even specific specialized vertical solutions.  Click on this link to access Montclair Advisors Public SaaS Index to see which firms offer leading SaaS solutions.

In the next 12-18 months we may be either headed for very slow growth in the economy or even another recession, but SaaS companies will continue to grow quickly because most companies are still looking for ways to lower their total cost of operations and improve their ability to innovate and increase their overall competitiveness.  As long as SaaS providers continue to deliver on their Cloud-based value propositions, they will experience rapid growth even if the economy continues to be tight throughout 2012.

Company:             athenahealth, Inc.