Company:        ServiceNow

Started:            2004

Located:          San Diego, California

Geography:     Global

Market:            IT Solutions

Products:         Cloud-based services that automate enterprise IT operations.

Key Customers: AGL, Bosche Siemens, CERN, Emory University, Equinix, Harrods, John Lewis, Juniper Networks, Lawrence Berkeley National Laboratory, NHS, PWC, REI, Sony Pictures Entertainment, Staples, University of San Francisco

Website:           Service-Now

Blog:                ServiceNow Commentary

Twitter:             @servicenow

Recent News:

Enterprise Holdings Selects ServiceNow SaaS for Global IT Services Automation

ServiceNow Files Registration Statement for Proposed Initial Public Offering

Eric Fisch of Equinix Named the Latest ServiceNow IT Hero

I asked Craig McDonogh, Director of Product Marketing at ServiceNow, a few questions about his business and view of the SaaS market in 2012 and beyond.

Did you start out as a Software-as-a-Service company?

Fred Luddy founded ServiceNow after serving as the Chief Technology Officer at Peregrine Systems from 1990-2003 and became very familiar with the IT and Service Management industry during his career. After years of building and selling solutions to the IT community, he really understood the pain of deploying traditional IT management products.   IT decision-makers were constantly being faced with the reality of doing more with less, shrinking budgets and Fred felt that delivering IT products as an Internet-based solutions would be the right way to go. Early on, many companies viewed using Cloud-based IT management solutions as just a crazy idea.

This was a classic ‘cobbler’s children’ scenario because IT struggled with the tools that they were using and Fred could see this dilemma especially since he was coming from the vendor’s perspective.  With this realization, he thought that building a SaaS company for IT Management that offered a platform for automating many types of IT services was a really innovative idea.

Back in the late 1990’s, for many IT professionals the concept of the ‘Cloud’ was typically buying a server off eBay and then putting it in their closet.  When Fred started ServiceNow he need to change this perception and was constantly driving up and down the Pacific Coast Highway in Southern California trying to get his friends to try his new Cloud-based product.

ServiceNow started as a bootstrapped company for many years because Fred was such a strong believer in the vision of a Cloud-based IT management solution and most investors weren’t interested in the concept.  Finally in 2005, he was able to get JMI Equity to make an initial investment of $5 million and that helped to jump-start the company’s growth phase.

With this investment ServiceNow as able to generate a series of early wins in the SMB market. Once ServiceNow gained momentum around its SaaS solution it wasn’t too long before the company started to get pulled up into the enterprise market with customers like TIIA CREF, Edmonds.com and Deutsche Bank.

Why do your customers buy from ServiceNow?

Customers are buying from us for the same reason they are buying iPhones and iPads, because these products are easy to use and they like the experience.  Our products are designed to be engaging and don’t require a lot of training to use them.

IT Management solutions over time have been built with almost too much functionality, but ServiceNow has been designed to reflect only what our users really need.  ServiceNow can be tailored to our customer’s specific requirements because there is a lot of flexibility built into our products to allow them to be configured at a relatively granular level.

In past, most IT customers didn’t get what they wanted in the first place because most IT tools weren’t able to map to their specific business requirements. ServiceNow wanted to provide a tool set that was very flexible. Because IT professionals like to get their hands on the product, we put an open demo of our product on our home page just so they can play around with it. We also offer ServiceNow through a standard subscription and this licensing approach allows customers to access all 24 of our current applications, including new ones that are developed and released.

We offer Big SaaS to our enterprise customers who have complex data compliance issues, local data security concerns or are in regulated industries like financial services.  Our architecture is not a multi-tenant architecture, it is a protected infrastructure, because we didn’t want to risk the co-mingling of our customer’s data.  We provide high-levels of security in our data centers and across our platform.  ServiceNow is relatively bullet proof when compared to other Cloud providers regarding how data is managed and along with our operational processes inside of our data centers.

Many of our customers come to ServiceNow because they are facing an imminent upgrade of their existing on-premise IT Management or Service Desk tool and it is going to potentially cost them millions of dollars and it a complete re-implementation of the product.  So they often start out saying, why not look at all the new solutions on the market, especially if there is no loss of functionality?  This is when they start looking at SaaS solutions including ServiceNow.

What do you see as the key trends emerging in the SaaS industry?

Several major trends are the growth of mobile, social, and the local Cloud capabilities in the market.  All types of workers are now using the Cloud and social-based products in their personal lives, and they start wondering, why should my work-based applications be so different?

For example, Disney employees only have about 30 seconds to make their customers happy. This means that making customers happy with their experience is very important because they are now key influencers in the market. Disney employees now need to listen to customers because they are turning around and sharing their experiences with your brand.  This means that their IT must evolve quickly to deliver mobile and social tools to enable their employees to provide a superior experience, which is transforming IT infrastructure into more of the company’s overall business infrastructure.  IT can no longer just be good at managing transactions or break-fix processes; they need to do a lot more for the overall business.   We believe this is a great opportunity for ServiceNow.

Another trend is Social IT.  Customers are looking for greater user self-service capabilities when working with internal IT which is transforming them into a true partner in the business.  All of our customers are looking better ways to interact with their internal users.  This trend is especially impacting the CIO’s team because they know that according to Gartner by 2015 nearly 50% of all IT Management will be SaaS-based, so the ‘big shift’ to SaaS is underway.

Mobility is also an important emerging trend.  IT now needs to support the Bring Your Own Device (BYOD) movement, and it really should be called BYO3, because most employees now have three devices that IT needs to support; their laptop, phone and tablet.  IT management needs to support these BYO3 workers on any of their devices and still need to be able to manage their infrastructure whenever, and wherever, they are located. The ServiceNow platform has definitely been designed to support this type of IT mobility.

 
What is your market outlook for 2012?

Our market opportunity continues to grow as we are seeing a convergence of three major areas where ServiceNow can really help our IT customers;

• Employee Self Service – Making it easier to interact with a wide variety IT services
• Automation – Improved ability to automate key business processes which can eliminate errors
• Consolidation – Provide tools that eliminate redundancy inside of IT and beyond

All of these market changes continue to position ServiceNow as the emerging Platform-as-a-Service (PaaS) provider for IT.  At our user conference last year, Knowledge 11, we saw the appearance of many user-designed applications, including those for IT but also new applications for other areas of the business built on top of the ServiceNow platform. Users are now using the ServiceNow platform to build solutions that extend well beyond IT, like HR self-service applications, and we will definitely see more of this as we move into 2013.

Company:        Hubspan

Started:             2000

Located:           Seattle, Washington

Geographies:  Global

Market:              Cloud Business Integration

Products:         B2B Integration

Key Customers: Ariba, CNET IBM, Interra IT, Middleware Management Partners Corp, NetSuite, NuBridges, SciQuest and Visa

Website:          Hubspan Website

Blog:                Hubspan Connections

Twitter:            @Hubspan

Recent News

Hubspan Announces Six New B2B SuiteApps for NetSuite’s SuiteCloud Computing Platform

Hubspan Channel Executive Selected by CRN and Supply & Demand Chain for Prestigious Industry Awards

Hubspan Achieves Record 2011 Growth Through Channel Innovation

I asked Tom St. Onge, Hubspan’s Vice President of Business Development a few questions about his business and his view of the SaaS market in 2012.

Did Hubspan start out as a SaaS company?

Hubspan was started in 2000 as an Integration-as-a-Service company.  Built on a single instance web architecture that was designed for the needs of Business Process Outsourcers (BPO’s) and Managed Service Providers (MSP’s).  Over time the company migrated to a SaaS business.

The company offers a middleware services layer, connecting business systems and processes through the Cloud. Today, Hubspan uses a mature single instance, multi-tenant infrastructure that meets the stringent requirements associated with PCI, US Defense Department, and is SAS70 Type II compliant.

Why do your customers buy from Hubspan?

Our customers typically want to improve or extend their infrastructure because they are looking for real-time access to information to better run their businesses.

For example, one of our customers is Visa and they are looking to package their payables automation capabilities for some of their external service providers.  By leveraging Hubspan’s platform and process transformation services they can now commercialize their network.  For most customers, it is difficult for them to figure out how to best connect third-party systems, let alone package and reuse these newly developed business processes.

Other solutions may provide connectivity but it isn’t always easy to get these API’s to work correctly.  Hubspan has already built and packaged more than 30,000 integration points with leading software providers like SAP, Oracle, Microsoft and Ariba.

Suppliers like Boomi and Cast Iron have also built adapters for the Cloud, but they are only application-to-application solutions.  Hubspan connects not only systems but also packages up specific business processes in a way that delivers a completed middleware layer for the Cloud.  More companies are using Hubspan because they want to extend their private networks by connecting to solutions like Netsuite, Visa is opening up their e-commerce system and Ariba is extending their buyer and supplier networks.

Hubspan charges our customers a monthly subscription and a small services fee.  Our competition is usually in-house projects and they will bring in large systems integrators like Accenture or IBM Global Services to hardwire together specific business processes.  This approach is expensive because business processes always change and they need more flexibility. Hubspan’s products allow our customers to gain time-to-market and leverage a variable cost commercial model.

Our advantage is that we not only offer the system adaptors and connectors, the business-to-business processes and the network to plug into.  Hubspan also keeps connections and processes up-to-date with new platform builds every 4 to 5 months.

What key trends to you see emerging in SaaS or Cloud Computing?

With the Cloud, the traditional approach of customizing systems together using mature technologies like webMethods, TIBCO or BEA is too rigid.  With the Cloud’s new level of flexibility it allows our partners to target new markets like small and medium businesses as well as to be able to support high volumes for even for the largest enterprises.  The Hubspan business process platforms are well suited to the requirements of the Cloud.

We also seeing the increasing use of real-time inventory and even management using RFID chips connected to finance and purchase order systems. For example, Terso a hospital and inventory management company, is now integrating emergency room refrigeration supplies to its inventory systems to indicate usage and send event notifications out to their suppliers and manufacturers as well.  This type of real-time inventory management is being used more frequently in healthcare and biotech industries to connect buyers and suppliers.

Another trend is building large-scale Cloud-based business-to-business and private networks.  This type of integration of Cloud-to-Cloud systems, or “Cloud Brokering”, represents a large growth area in the market for very large companies like who are looking to tie into Cloud systems like NetSuite.

What is your outlook for the balance of 2012?

Automating key customer business processes in the areas of e-commerce and accounts payable automation was significant drivers of growth for Hubspan in 2011 and the company expects this to continue throughout 2012.  Hubspan also saw an increase in demand for integration outside North America particularly in Europe and the Middle East.

We are anticipating a great year and continued growth in e-commerce, especially for biotech, pharmaceutical and manufacturing markets.

Company:             Lumesse

Started:                  2003

Located:                Guildford, UK

Geography:          Global

Market:                  HCM, Integrated Talent Management and Learning 

Products:              Lumesse TalentLink and Lumesse Learning

Key Customers:  Siemens, Heineken, Levi Strauss & Co, Nike, GlaxoSmithKline, Tommy Hilfiger

Website:                Corporate Website

Blog:                      Voice of Lumesse

Recent News:

Learning made easy – Lumesse ETWeb v11.1 introduces award-winning learning management system Lumesse named ‘Best Talent Management Software Provider in Greater China’ for the second year running Lumesse ranked #1 for customer satisfaction in HRO Today’s “2012 Baker’s Dozen” survey of talent management vendors

I asked Andrew Roadaway, Lumesse’s Director of Communications a few questions about his business and his view of the SaaS market in 2012.

Did you start out as a Software-as-a-Service company?

Lumesse was created initially in 2003, as Stepstone Solutions, as a division of an European Internet Job-Board business. So our roots are in online service delivery and our first products were Internet-delivered offerings, really before it was called SaaS. So SaaS is in the DNA of the company from day one, and it continues to be our key delivery mechanism.  We also offer some limited on-premises and Lumesse-hosted solutions, to meet the needs of customers who are not ready to go to SaaS.

Why do your customers buy from Lumesse?

Our SaaS products have substantial depth of functionality and they are highly configurable, both in terms of overall functionality and individual user experience, so we can closely meet our customer’s unique requirements. We have a strong focus on global requirements, both within our products and in our approach to sales, service and support, we have 23 fully-staffed offices in 17 countries, so we can deliver against even the most complex international project requirements, but still with a lot of local market knowledge and support.

We also develop our products to meet local legislative, regulatory or best-practice requirements.  For example, we support the ISO270001 Information Security requirements and support for over 50 languages. Finally, we have a strongly customer-centric culture with a long-term focus on customer success, we measure customer satisfaction formally four times a year across our entire customer base and it’s a major input to our business strategy.

What do you see as the key trends emerging in the SaaS industry?

There’s little doubt that multi-platform delivery (PC’s, tablets, and smartphones) is increasingly important as well as greater interactivity and personalization in the user experience. Our products are designed to give end-users a more social-network-friendly, collaborative user experience.

What is your outlook for the balance of 2012?

There’s obviously a lot of turbulence in our market, with two major players, SuccessFactors and Taleo, currently in the process of being acquired. In the short term we think this will benefit vendors like Lumesse as the high degree of roadmap uncertainty these type of transactions create will make many customers wary of commitments by such vendors. We expect the market to be healthy and anticipate another year of solid growth, especially as we bring several new products and versions to market.

After attending CloudForce conference in San Francisco last week it started to become apparent that Salesforce.com’s strategy around the Social Enterprise might be real after all.I have to admit that the first time that I heard about Chatter and the Social Enterprise, I was skeptical, but now that more than two years have gone by, I am starting to believe that this could be a major shift in the SaaS market.

There have been a number of big players emerging out of the social software market over the last five years including LinkedIn, Twitter, Facebook, or and even Yammer.It is clear that enterprise collaboration has also been around for a long time with content management and search products but none of these companies have really changed the enterprise software landscape.

At the CloudForce event, Marc Benioff, the CEO at Salesforce.com was able to let his customers and management provide context and examples of the Social Enterprise vision.I have always found it is much more credible to hear from customers and what they are doing with their SaaS solutions than having the ISV tell the audience why it is the next big thing.Here were a few of the customers who are using Salesforce.com’s social SaaS solutions to connect and extend their organizations:

• NBC/Universal.They are using Salesforce.com’s products to deliver a single, integrated view of their organization, across the many different operating units that make up the company. This type of near real-time integration is new for the NBC management and employees.NBC has deployed iPads across their organization and the Salesforce products are used to improve collaboration and even develop new revenue streams across business units. Watch this Video Case Study.

• Burberry.Most people think of Burberry as the raincoat company but they are a global fashion brand.Angela Ahrendts Burberry’s CEO is fully committed to a vision that transforms their company into a fully digital enterprise.This means that their customer will have total access to their brand anytime, anywhere.As she said in this short videoabout the company, “Companies need to be totally connected to their digital brands, otherwise what will your business become in the next five years?”John Douglas, Burberry’s CTO was at the event and explained that they are putting everything about their brand online and connecting all of their 4,500 employees worldwide using Chatter.They have 650 groups across their company and have taken about 6 months to roll-out the Chatter product to enable management and teams to share results, press coverage and even digital assets.

  Like several other companies who shared their Social Enterprise experiences at this event, Burberry uses SAP for their back-office services and Salesforce.com for their front-office functions.As Burberry continues their Social Enterprise rollout in 2012, the next couple of phases are to connect with their vendors and then ultimately with their customers.

• Kimberley-Clark.Most people know this 140-year-old company as the firm that produces Kleenex, Scott towels and Huggies.An older, iconic brand in the market. The company’s CIO Ramon Baez discussed how they are transforming their company into a Social Enterprise that is using Salesforce.com to listen to their customers and unleash new customer-facing capabilities.They are using Radian6 to monitor what is being said about the company and their brands.Their product teams are coming up with new ideas and are better engaging with their customers because they have this social market data.As Mr. Baez explained, Social is not about fun and games, it is all about business and winning. Here’s another interesting video case study.One big challenge for Kimberly-Clark is how do they inspire their customers in less than 2 minutes and get them to engage around their products? There was a very innovative Force.com application, that demonstrated how a Kimberly-Clark sales rep using an iPad, can hand their customer what looked like a dirty screen to clean off.The customer would then use their fingers to swipe and clean the screen  and then they take a short quiz that would suggest various Kimberly-Clark product solutions for them based on their answers.If they were interested in any of the solutions, a proposal is auto-generated for their review and they can buy it by just signing the proposal with their finger.This entire interaction might take less than 10 minutes.For Kimberly-Clark sales reps this is moving at light speed compared to what they had been doing for the last 140 years.What Mr. Baez demonstrated is that they want to deploy technology that their workforce really wants to use, and that is not being forced to use.He said that their existing sales teams were very comfortable to doing things their old way but once they gave them an iPad with these Social Enterprise capabilities they embraced them, and it has really changed their mindset and their culture.

  Kimberly-Clark is also a very happy SAP customer and has connected their many Salesforce SaaS products  using IBM’s Cast Iron Cloud-based integration solution.

• UCSF Medical Center. Dr. Michael Blum the CIO at UCSF discussed how the Social Enterprise philosophy is being used in a medical context.He shared that in reality patients are also customers and as a doctor the challenge is how can you best engage with them?This requires major change in the doctor-patient relationship.It means that doctors will have to change their interactions from a once-a-year, 3 minute discussion, to a trusted, on-going relationship.UCSF is now experimenting with Chatter as way to securely connect doctors, nurses and patients.This is helping the doctors to work with their patients to get more of their data into the hospital’s systems, which are important to improve patient outcomes as well as to aid in clinical research.

• Toyota.This was the last customer discussed and they shared how Toyota is building the Social Enterprise approach to their products, and it has even created it’s own social network called Toyota Friend.This was an interesting example of how Toyota is using Force.com to create a personalized social product. There is more information about Toyota Friend in this Video.

As Salesforce continues to rollout not only traditional Business-to-Business SaaS solutions they are also working with their customers they are also working with to deliver Business-to-Consumer capabilities through products like Radian6, Heroku and Sites.Many of the executives from many of their acquired companies stood up and discussed how they are building their products for Salesforce.com with the Social Enterprise in mind. Marcel Lebrun, CEO at Radian6 discussed how customers are embracing and using social technology to delivery competitive advantage in markets like the Consumer Packaged Goods industry.

The Social Enterprise is also being extended to employees not only through Chatter but now through Salesforce’s recent acquisition of Rypple for HR Performance Management.They are deploying a new type of performance offering, that leverages some new gamification techniques to try and get higher levels of user adoption inside the enterprise.They have also announced an important hire of John Wookey, an industry heavy weight who built products at both Oracle and SAP.Mr. Wookey will now run the HR Cloud business for Salesforce.com.

At the end of CloudForce, it was obvious that Salesforce has a wide array of Social Enterprise solutions and their customers are leading this new SaaS revolution.

Gartner projects that the global SaaS market will grow to more than $21 billion by 2015, with a CAGR in excess of 15%.  This means that the SaaS market will be growing 5 times faster than the traditional on-premise software market and customers are now making a serious pivot towards SaaS.  This change in buyer preferences has become a big driver for many traditional ISV’s to start seriously considering moving their businesses towards SaaS.  This move to the Cloud is causing traditional software businesses new set of unique challenges such as:

• How much will my firm have to invest in order to reach profitability and how long will it take?
• Will our new SaaS products result in existing customer cannibalization?
• Should we build our own data center or use a partner? What are our options?
• How will our go-to-market approach need to change?
• Are we ready to move to SaaS?

Hybrid Strategies

Montclair Advisors has worked with, and profiled, many different types of Hybrid firms and they are building their new SaaS businesses generally in four different ways.  Many of these transition strategies are based on the realization that SaaS in not just a software delivery option, but a different business model.  The considerations listed above are just  some of the common questions that are asked and a reason why many of these transition strategies have emerged recently.  The first strategy is based on acquisition of SaaS assets.

Buy & Fly

This strategy is based on ISV’s purchasing smaller SaaS firms as a way to jump start their SaaS initiatives.  By purchasing an existing SaaS firm, ISV’s can gain instant access to some critical ingredients that are needed to build a successful and profitable business including:

Big Data

This approach is well suited for organizations that have products that manage very large amounts of data and there is a business opportunity to collect, aggregate and analyze it.  As an alternative to building a new SaaS platform or set of new products.  The Big Data strategy allows the ISV to leverage existing Cloud-based analytics product instead of having to build their own.  By developing a standard way of accessing their on-premise data assets, it allows ISVs to quickly build value-added data services that can help jump start their SaaS initiatives.  This approach is being used effectively for vertical markets or highly specialized solutions that may require a lot of data management.

What we have seen is that many ISV’s are adopting one or more of these four strategies to hasten their move to the Cloud both for defensive reasons, as well as to find new growth markets. This pace has quickened recently as the large master brands are starting to make moves to acquire SaaS expertise and recurring revenue streams, just like SAP did by buying SuccessFactors and Oracle did as they purchased both RightNow and Taleo.

For more information about these Hybrid SaaS Strategies contact me at kevin@montclairadvisors.com.

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

Key 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

I asked Joe Payne, Eloqua’s CEO, a few questions about his business and view of the SaaS market in 2011 and beyond.
Did you start out as a Software-as-a-Service company?

Eloqua has always been a SaaS company from the day it was founded in late 1999. The vision at the time was to help businesses sell products through a combination of web analytics, email, and chat. As prospect data was collected and tracked through Eloqua, it soon became obvious that companies could really benefit from tracking this “digital body language” and then use it for demand generation. We went on to develop marketing automation technology and became the unquestioned leader in the space.

We recognized early on that businesses wanted cutting edge technology but were often burdened by the expensive infrastructure and IT staff. Eloqua was a pioneer in the Software-as-a-Service delivery model long before it became popular.

Why do your customers buy from Eloqua?

We help our customers win their markets.  If you can be more effective and faster than your competitor, you can win your market.  Eloqua’s technology and best practices helps our clients win.

A major reason companies choose Eloqua is that we invest heavily in our customers and really promote a culture of customer success. Our SmartStart program is an on-boarding process that provides customers with marketing best practices from day one. With a SmartStart our clients are up and running in days.  It is such a successful program that we offer a money-back guarantee to all clients who use it.  We have numerous resources available to our customers helping to ensure their success. We provide education services through Eloqua University, best practices through our Topliners community, success coaching, and more. Our culture is rooted in customer success and every employee’s bonus is actually tied to customer satisfaction.

Finally, our product is the deepest and most powerful in the industry.   As the largest player in the space we can invest in R&D to innovate. For example, we’re currently the only vendor in our space to invest in HTML 5 for our platform delivering an exceptional browser interface and user experience. We also developed the industry’s first online marketplace for B2B marketing applications called the Eloqua AppCloud. The AppCloud eliminates custom integration offering on-demand “connections” from marketing, sales and social media applications to Eloqua.

What do you see as the key trends emerging in the SaaS industry?

Social, Mobile and Apps.  SaaS applications are perfectly situated to take advantage of emerging trends in a way that on-premise software cannot.

• SOCIAL.  Because our applications are already in the cloud we can use components to connect and embrace social media.  We allow our clients to quickly tie their marketing and social efforts together and to track the effectiveness of both.  It is almost impossible for an on-premise application to have this kind of social extensibility.

• MOBILE.  Extending the capabilities of a SaaS app to a mobile device is easy.  We build that mobile app once and it works for all our customers.  We don’t have to worry about different firewall settings or VPNs or configuration issues for each client like an on-premise vendor would.  This gives us a tremendous advantage in responding to the speed with which customer browsing is changing.

• APPS.  Apps allow cloud offerings to talk to each other.  Any Eloqua customer – no matter the size — has instant integration with D&B, ON24, Cvent, Klout, Radian6 and 35 other platforms.  That integration all occurs in the Cloud. Such an undertaking in a non-SaaS environment would be cost prohibitive for most companies.  This is a huge advantage for SaaS companies.

What is your market outlook for 2011?

Our outlook is positive.  Our products are market-leading.  We are twice as big as our closest competitor and we’re in a fast growing market, which will continue to experience strong growth in the next few years. Compared to other software categories, there is still relatively low adoption of our technology. Companies in the software and technology space were early adopters and now we’re seeing other vertical markets adopt marketing automation. We also introduced an entire new business category, Revenue Performance Management (RPM). While RPM is still new, the category is gaining steam (other vendors and analysts in the industry are adopting it) and we expect to see this continue into 2012.

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.