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.

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

Company:             ServiceSource International

Started:                 1999

Located:                San Francisco, California

Geography:           Global

Market:                  Service Revenue Management

Products:              Service Revenue Performance Suite: Analytics Cloud, Service Sales Cloud, Channel Sales Cloud, eCommerce Cloud, Dynamic Quoting Cloud, and Installed Base Management Cloud

Key Customers:     Affymetrix, Blue Coat, CA Technologies, Isilon Systems and NEC

Website:                ServiceSource

Twitter:                 @service_source

Recent News:

ServiceSource Releases Service Revenue Performance Suite to Bring End to End Service Revenue Management to the Cloud

ServiceSource Announces Partnership with Good Technology to Enhance Recurring Service Revenue and Customer Loyalty

Service Executive Industry Board Adds Three Industry Experts to Support the Standards Process and Thought Leadership

I asked Ganesh Bell, ServiceSource’s EVP of Products a few questions about his business and his latest product announcement.

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

The company launched in 1999 and really started out offering both SaaS and a managed service solution for customers who wanted to improve their end-to-end service revenue management process. When we refer to service management we include hardware, software, and SaaS companies that want to maximize their recurring, maintenance and service revenues related to their products.

ServiceSource has a Cloud-based suite of offerings that are more performance management focused than a typical transaction type of application like billing or metering. Our service management platform consists of a data management engine, business intelligence and a set of applications and managed services designed business performance improvement.

We feel that this is an under-served market segment and that there are a lot of opportunities to improve a customer’s revenues just by managing the renewal and subscription process more efficiently. We estimate that there are approximately $150 to $160B worth of software and hardware renewals occurring on an annual basis and that there is at least $30B of additional revenue that is being left on the table.

As you may know already, ServiceSource just went public a few weeks ago on the NASDAQ and raised over $87M in proceeds. We also recently announced our first quarter results which included record revenues of $46.1M which was up over 40% from Q1 of last year.

Why do your customers buy from ServiceSource?

We offer a unique business model where we operate on a pay-for-performance basis with our customers where we only get paid when we can increase our customer’s service and maintenance revenues. Our partnerships with our customers need to be 100% self-funding, where the incremental revenue gains exceed our fees. On average, the return for our customers is around 15% and we are currently working with over 100 customers and have about $5B in service revenues under management. We offer a scalable Cloud application platform that manages over 700,000 transactions annually and have over 40,000 channel partners.

Another reason our customers use our service that many of them have also grown their businesses through acquisition and over time this has created a big problem for them because is really difficult to produce an accurate list of their customers and the all products that they own. ServiceSource uses a combination of our own applications, best-practices expertise that we have developed and our people to solve difficult problems like this one. Because once we have an accurate installed customer database it makes it much more efficient to manage renewals as well as provides for additional opportunities to deliver value to the our customers and generate incremental revenue for both of our firms.

Customers can also decide to just outsource their entire renewal processes to ServiceSource and we will take over their global renewal process. In this type of arrangement we can use a combination of direct and indirect teams to deliver value by managing renewals as well as cross-selling additional products.

Which new products are you launching?

We are launching a new end-to-end suite for service revenue performance management with our early customer and partner NetApp. Our suite contains these applications; Installed Base Management, Dynamic Quoting, eCommerce, Service Sales for renewals, Channel Sales which helps to facilitate sales team collaboration and performance management, and Analytics which provides visibility across the service revenue process using role-based dashboards.

New Applications

Installed base management helps our customers to cleanse business data and provide integrity to their installed base system of record. The product also leverages the installed base system of record to provide support for customer success management activities and act as a way to extend channel capacity.

We believe benefits of this application are to help reduce our customer’s time from quote-to-close, improve the accuracy of installed base data, which should aid in upselling and cross selling. By having more accurate data it will also help customer services to be more effective and provide better service.

Dynamic Quoting is an extension to our Installed Base Management application. This product provide a quoting engine for service sales professionals, which is a new area for these groups who are still using Microsoft Excel to manage renewals and recurring revenue sales. We have built-in our own best practices into quoting functionality that is built into suite, which can quickly help to automate this process for the service professional.

I was going to write this post earlier in the week but it seemed that everywhere I turned I saw more developments and wanted to include them.  The market is really starting to get frothy and there are many big SaaS/Cloud deals happening and companies going public with very large market caps.  Let’s take a look:

Recent Acquisitions

SuccessFactors (NASDAQ: SFSF) Acquires Plateau Systems for $290M, which was paid in half cash and half in stock.  This is an interesting move since it is the first acquisition that could be considered ‘core’ functionality when compared with other acquisitions like CubeTree (Collaboration), YouCalc (Analytics), Inform (Analytics) and Jambok (eLearning).  Plateau also has a fairly significant product portfolio overlap including compensation, performance management and succession planning, so it should be interesting to see how these offerings are consolidated.

Plateau has a very respectable customer-base with a large number of federal government customers as well as many large enterprise customers.  The company also was profitable and has some interesting Platform-as-a-Service capabilities that should be very useful for a larger SaaS portfolio.

Based on the market basket of publicly traded SaaS firms, this deal will make SuccessFactors the second largest firm in the group based on current revenues.  We estimate that at their current quarterly run-rate of $68M and Plateau’s estimated annual revenues, the combined company now is probably around $340M, which is only second to Salesforce.com.

CenturyLink (NASDAQ: CTL) Buys Savvis (NASDAQ: SVVS) for $2.5B, which is now third largest telecommunications company in the US with $18B in annual revenues.  The company had purchased Qwest earlier in the year and that deal was finalized on April 1st.   Now with the acquisition of Savvis, CenturyLink is moving into the Cloud Computing market with more than 48 data centers globally.

This is the second major deal in the Cloud Computing market of an emerging Infrastructure-as-a-Service provider, when Verizon purchased Terremark for $1.4B in January.  This should stimulate further consolidation of other providers and Rackspace may be the next target.

Salesforce.com (NASDAQ: CRM) Picks Up Radian6 for $326M for the Canadian social media monitoring company.  Radian6 helps their customers monitor ‘hundreds of millions’ of social media conversations. Salesforce believes that the acquisition will enable it to enhance all of its products, including Sales Cloud, Service Cloud, Chatter and Force.com.

Infor and Golden Gate Capital Buys Lawson Software for $2B.  Now this is technically not a SaaS or Cloud related deal but it just is another example of the pressure traditional providers are feeling from the up and coming SaaS and Cloud providers like Netsuite, Workday and even Oracle’s new Fusion offerings.

Recent SaaS IPO’s

Cornerstone OnDemand (NADSAQ: CSOD) went public on March 16th and quickly captured a market cap of $800M, even when the company lost more than $45M.  The company offers a suite of Talent Management solutions similar to what is offered by SuccessFactors and Taleo.

ServiceSource International (NASDAQ: SREV) completed their IPO on March 25th and were valued at more than $800M as well.  ServiceSource helps companies manage their revenue streams from renewals, maintenance and subscription agreements, which is especially important for SaaS firms.

Responsys (NASDAQ: MKTG) was able to launch into the public markets on April 21st and got a very respectable market value of $2.4B.  The company offers SaaS-based software and services that help retailers and eCommerce firms build and manage online campaigns.

By Kevin Dobbs

Montclair Advisors, LLC

Now that many software companies really feel that the risks associated with a second recession are firmly in the rearview mirror, it now seems like everyone is looking to grow their businesses.

I read a great post yesterday by Bruce Cleveland at InterWest Ventures about the Value of Growth for SaaS Companies, which I thought really accurately captured a challenge that many software firms face when transitioning to a SaaS model.   This is a subject that is near and dear to me given my background as a reformed marketing executive and someone who was responsible lead generation at Oracle years ago during the Tom Siebel and Marc Benioff era.   I think it was Tom Siebel when he was running Oracle’s inside sales team that told me “I want it to rain leads from the sky!” At the time I was actually shocked because he was asking me to literally drown his sales team with qualified opportunities who wanted to buy Oracle’s database products.

As I have come to learn that he knew exactly what he was talking about and his track record demonstrates that productive sales teams deliver amazing revenue growth results.  Bruce’s post highlights that a SaaS company without meaningful growth is not worth very much and probably will fetch the low-end of the valuation curve, which is still pretty good in today’s crazy market (See last week’s post about the SaaS Bubble).   So how are high flying SaaS companies like Salesforce and SuccessFactors achieving CAGR’s in excess of 30% every year?   Check out this chart I put together on some of the leading publicly traded SaaS firms (sans Salesforce because they will skew the chart):

As you can see the companies with the higher growth rates are also the ones that have high market caps (valued more highly by Wall Street).  What is really interesting is that SuccessFactors was able to grow by almost 50% for the past three years, even through one of the worst recessions in the last 100 years.  The value of growth can also been seen by a company that recently went public, Cornerstone OnDemand, they have been rewarded with a market cap that is over $800M even though the company lost more than $40M last year.  Seems crazy right?  But they have a great organic growth story along with a major channel relationship with ADP which could also signal even faster growth in the future.

If you talk to any software sales rep they often complain about their pipeline and the lack of quality leads. Reminds me of those coveted Glengarry leads  from Mitch and Murray downtown.    So at the heart of all of these companies and their rapid growth rates is that they have all developed a core competency to generate high quality leads and build pipelines quickly.

(click on picture to see clip)

Here are some tricks that I have learned along the way that will help you to build out your SaaS lead generation strategies:

• Use a Portfolio Approach - Depending on your product, buyers, and market there may be many ways to generate interest.  Campaign elements of a typical lead generation strategy are a combination of organic and paid web traffic, email campaigns, webinars, customer programs, social media and targeted events.   Don’t put all of your investment in a single demand generation approach, but reward the tactics that generate quality leads at an affordable price.
• Test and Test Again - With the portfolio approach you will need to continually test your messaging, packaging, value propositions, and price points.   The best-in-class SaaS firms are continually testing and refining their lead strategies.  This is important as most SaaS marketing organizations are trying to lower and optimize their Customer Acquisition Costs (CAC).
• Automate Where Possible -  There are a lot of great Sales 2.0 tools available today that can give you a real unfair advantage in the lead generation process.  Companies like Marketo, Pardot, Eloqua, Constant Contact, NetSuite and even Salesforce offer many tools to help you automate and analyze your marketing efforts.  I would definitely recommend implementing a lead nurturing or drip marketing program to continue to work your lower quality leads, this is a great way to build your pipeline over time with little direct human intervention.
• Track Everything - Make sure your sales operations and marketing teams are tracking and analyzing all of your lead activities and conversion rates.  You don’t need to be overly complex, but just tracking some basic things like lead scores, lead acceptance rates, leads converting to opportunities and close rates can help your organization to fuel your high growth SaaS sales engine.

With Cornerstone OnDemand’s recent IPO (NASDAQ: CSOD) and their high valuation based on a negative EBIDTA, many are starting to ask if we are headed for a second Internet or SaaS Bubble?

I do agree that some of the valuations at this point are a lot higher than a reasonable person would expect, but this is probably just pent up interest in the technology sector. It doesn’t help that Facebook and LinkedIn has seriously pumped up the valuations for Internet/Social Media firms, but today’s SaaS companies are very different from the Dot Bombs of 1999/2000.

Remember these companies?

All of these companies were built on bad business models, too much money and expectations that were out of control. And by the way are all out of business.

But not all of the Internet companies that were formed during this period were bombs; in fact there are a number of firms that are now pillars of the technology industry including these firms:

It would be safe to say that each of these companies struggled during and after the Dot-Com collapse but they were able to modify their models to take advantage of the efficiencies that the Internet provided. Amazon has built a business that can effectively compete against the largest retailer in the world, Walmart, even though its sales are only 1/12^th their revenues.

All of these Internet Survivors had to develop a real business model that would deliver solid margins, profits and growth. They each had to assemble experienced management teams, learn how to deliver superior customer service and build trusted brands. Not easy to do, but they did it.

Fast-forward to today and we have a whole new set of Internet and Software-as-a-Service companies that have emerged and gone public including these firms:

(1) CSOD IPO: March 17, 2011

(2) SREV IPO: March 25, 2011

As you can see most of these companies were founded before the Internet Bubble burst and were forced to create real business models that could deliver profits.

At Montclair Advisors, we specialize in SaaS business advisory services and we know many of these firms quite well and they all have strong management teams, growing businesses and staying power. Unlike the Internet firms that went IPO in 1999 or 2000, most of these firms have had to build up their businesses over ten or more years and are based on some form of recurring revenues.

Major differences between the companies on this list versus the early Dot Bomb firms include:

• Proven Over Time. As you can see most of these firms are at least ten years old and have weathered the economic changes through the last two recessions.

• Businesses at Scale. Most of these companies are over $100M in annual revenues, which means they have been successful in selling into multiple markets and geographies.

• Recurring Revenue Streams. Anyone who has been involved with a company that has developed a subscription business can tell you how hard it is to create a meaningful recurring revenue stream. The advantages of being a SaaS software company based on subscriptions means that revenues remain consistent so there is a high degree of transparency and visibility.

• High Degree of Customer Satisfaction. All of these companies are dependent on satisfied customers that want to renew their annual subscription agreements and purchase more services. This is quite different than the ‘drive-by’ relationships many of the early Internet companies developed with their customers.

• Strong Management Teams. After the Dot Com crash it became much harder to file for an IPO and manage a company in the post Sarbanes-Oxley world. These next generation of Internet companies have attracted leading management expertise that knows how to innovate and rapidly scale viable businesses.

So are the valuations of companies like Cornerstone OnDemand and Servicesource, Facebook and LinkedIn too high? Are we beginning to see a SaaS Bubble? Maybe, but all of these companies have been built for the long term and will be around long after any correction, unlike their early Internet cousins Web Van or Kozmo.com.

Company:                   Merced Systems

Started:                       2001

Located:                      Redwood Shores, California

Geography:                North America

Market:                        Sales and Service Performance Management solutions

Products:                   Merced Performance Suite, Merced ICM, Merced Intelligence and Merced Express Products

Key Customers: Sprint, T-Mobile, Dell, Delta Airlines, Discover Financial Services, Dish Networks, ING Direct, Kaiser Permanente and OnStar.

Website:                   Merced Systems

Blog:                        Performance Matters

Twitter:                   @mercedsystems

Recent News:

Merced Systems Awarded Patent for Temporal Specificity

Merced Systems to Host Sixth Annual Customer Summit for Sales and Service Industry Leaders

Merced Systems Achieves Eight Consecutive Years of Growth and Profitability

I asked Harold Goldberg Merced Systems’ Chief Marketing Officer about his business and his view of the SaaS market for 2011.

Why did Merced launch a Software-as-a-Service business?

We started in 2002 and launched our first private cloud offering. At that time we typically sold to the business user, who in turn had to work with IT to get their approval. Our customers liked our SaaS-based approach, since they could have an expert manage their software on-line, and that expert is Merced.

This service started with just a single company and it has just grown organically over time by just listening to our customers about what they needed.

A few years ago we started to expand this offering and launched our SaaS service with subscription payment plans with users paying a fixed fee per month for access to our products. Most of our initial customers signed up for a 2-year subscription and then they could add more years and users to the contract when they were ready. We know that most of our large customers tend to move a lot of people around inside their organization and like to have a fixed price for our services because it provides them with a predictable way to plan for their costs in the future.

We have seen the use of our SaaS model in a variety of different ways including one customer, who wanted to do a pilot using the SaaS product because they wanted to get into production quickly, then they bought out the subscription and converted to a license and had us managed their solution in our data center.

Merced will usually lead with our SaaS offering but will also offer managed services or perpetual options when that meets our customer’s needs. We find that it all depends on the organization and their resources and capacity to manage another enterprise application.

Customers like our flexibility because they can have it their way and today we are definitely seeing more customers who are interested in SaaS and Private Cloud solutions.

Why is moving to SaaS important for Merced?

Because we sell to large enterprise customers, it has been important to be able to start with an initial sale to a department then spread out across the customer’s organization over time. This is an important part of the SaaS business model. We can get our customers a product to get started with easily and then demonstrate a real ROI, and rapid time-to-value because our products can be turned on relatively quickly compared to their on-premise alternatives.

Most sales and services organizations are looking for ways to the costs associated with internal operations. Our customers look at our ROI as an important driver over the long term. In the near term they are looking for improved performance around sales and services effectiveness, which usually translates into increased revenue production. Our products help by delivering better compensation plans, process visibility, coaching and the result is that reps and agents become more effective, and our customers usually see between a 20-40% productivity increase with the use of our products. Our SaaS products just help us to get our products into the customer’s hands much faster than a traditional on-premise deployment model.

Another value of SaaS is that it provides transparency for our customers as well as their partners. Our customers want to see real business value and since our products are specifically designed for front-line workers, and everyone is focused on making these employees more productive, a monthly investment in Merced translates into visible performance improvements and higher revenues. The SaaS solution allows them to pay monthly and renew and expand their footprint based on real business results.

I think the last reason is around our financial model. Our SaaS and managed services solutions provide a predictable revenue stream that is valued by our management and investors. Because SaaS revenues are recurring it allows us to more accurately forecast revenues and tie them back our expenses in development, support, sales and marketing. Over time this has become a real win-win for the company.

What lessons have you learned in building your SaaS business?

Actually our SaaS model looks a lot like some of the insurance companies I have worked with in the past. Company revenues are based on building a book of business and compensation plans are built on top of customer retention, cross-selling and up-selling new products, so the model is familiar to me.

A couple of the lessons we have learned over time are that we can deliver value much faster to our customers using the SaaS model. Since we are managing their technical environment, it is possible for us to take lessons learned and apply best practices and how we manage our software much faster than our customers could. This also applies to the entire service delivery process including support, because they can see the customer’s entire environment.In fact we can get in front of issues before they happen. This helps build high customer satisfaction with our customers, which is why we have a 98%+ renewal rate.

Because we manage our customer’s technical environment, it also makes it more efficient to migrate customers from an on-premise version to our SaaS version and even makes our regular SaaS implementations go faster and smoother.

As I mentioned earlier, our customers like the flexibility of our product delivery options. Many customers will start with a departmental pilot using our SaaS offering. Another division might want their version of Merced in their own data center and we can then link those versions to create a hybrid solution to meet our customer’s needs. We think this is the real promise of the Cloud, to be able to integrate our SaaS products with our customers existing and new on-premise systems, which makes us unique.

Company:                   Ariba

Started:                       1996

Located:                      Sunnyvale, California

Geography:                Global

Market:                        Collaborative business commerce solutions

Products:                    Ariba Commerce Cloud Buy, Sell and Manage Cash

Key Customers:         Avaya, Clariant, Deloitte, Del Monte Foods, Ohio State Medical Center, OfficeMax, Saks and Staples

Website:                      Ariba

Blog:                            Ariba Exchange Blog

Twitter:                       @Ariba, @AribaExchange and @AribaContract

Recent News:

B&H Boosts Business through Ariba

Growing Enterprises Boost Profits and Performance with Ariba

Gasunie Fuels Better Commerce with Ariba

I asked Dan Ashton at Ariba a few questions about his company’s transition to a SaaS business model over the past few years, ideas around best practices and lessons they have learned.

Why did you launch a Software-as-a-Service business?

We started our transition to SaaS about 6 or 7 years ago. Our entire management team looked into the future and realized that this was the way the market was moving and they wanted to get in front of this growing trend.

When we looked at our installed base, we had mostly large, Fortune 100-type on-premise customers, who had all highly customized our solutions. We felt that heading down this path exclusively we were limiting our market to only the very largest companies and we saw the potential to embrace SaaS and how it could open up our opportunities to serve a broader section of the overall market.

What lessons have you learned in building your SaaS business?

In order to move to SaaS you need to really change your culture in order to successfully embrace the subscription business model. We had to understand and communicate inside of our organization, and focus our energies and talent on building out this new model. We didn’t want to just re-create our CD-based business in the Cloud, and it was important to convince everyone that this was the right thing to do for our company.

It required that we look at our entire business in a new way. For example, deploying our software through a self-service approach instead of always having to use a professional services team to implement out software. We also had to realize that our first SaaS product was not going to be perfect or functionally complete as compared to our existing on-premise product, but this was just a step in our transition to a subscription business model and that it was good enough to start with. Today our subscription products offer more and better functionality that their on-premise counterparts.

From a technology perspective we also had to rewrite our products on top of a new multi-tenant architecture because the old CD-based architecture was optimized for the scalability and flexibility requirements of our new SaaS business. So we made this investment in rewriting the products but we also invested in bringing new SaaS-experienced talent with specific skills into the organization to help in other areas of the business as well.

We didn’t want to alienate our existing customers, and realized that we couldn’t force them to move and told them they could do it in their own time. This meant that we had to continue to support our existing CD-based products.

For those customers that have highly customized solutions, it is not easy to migrate to SaaS and right now they don’t want to change. Our approach has been to provide additional Cloud-based value-added components like Procurement Catalog content or RFP Management Sourcing, to allow these customers to leverage their existing investments while being able to take advantage of our new SaaS-based solutions.

Product adoption and utilization are also very important. When a customer successfully adopts our products they are usually satisfied and will renew the service. When they don’t use the product fully, they can’t unlock the full value of our solutions, and then we might be at risk.

Ariba tracks all sorts of processes inside of our SaaS business including renewals and customer satisfaction. We send out surveys just after an implementation goes live, as well as throughout the subscription term because we don’t want any surprises. When issues come up, they are escalated all the way up to senior management, if necessary, because we really want happy customers. That is why our customer renewal rates are above 97%.

As part of the transition we created a customer success team that was focused on customer satisfaction, making sure they were utilizing our products to their maximum benefit, helping with product adoption and sharing best practices.

We also monitor when customers don’t put enough spend through our solutions, because when they buy our products they are anticipating a certain level of savings. Ariba is motivated to get our customers to put their spend through our system, because we sell our products based on value-based pricing model. So we are motivated for our customers not only to get value from our systems but we also get additional revenue, so it is a win-win. By putting more spend through our system customers can typically save between 5-15%, which for most customers can be a lot of money.

Another lesson learned was that we had to change to our financial model, especially the necessary shift from license to subscription revenues. This new cash flow model affected everything, and made us more conscious of how we were spending our money.

We also had to work hard to re-calibrate our story and with investors and the industry analysts. This was because our commitment to our SaaS strategy meant that if they didn’t really understand our plans, and the implications of our business changes, there was going to be a price to pay. This is why we carefully explained our roadmap to the financial community and that there were going to be decreased revenues and earnings over the near term but longer term we were really making an investment that would deliver increased stability and security for our company in the future.

During the SaaS transition our management team really had to make changes at all levels of the company. They had to communicate the message and sell the model both internally and externally. It is a hard transition and unfortunately not everyone can make the transition, we just found that some people just can’t do it. Our management stayed focused on customer satisfaction because they knew that a key part of the SaaS model was keeping our customers happy.

Why was moving to SaaS important?

One reason is that it really expanded our addressable market by being able to offer a more affordable, flexible SaaS product. Customers could start with our Sourcing or Contract solutions by doing a free trail and then license the products for as little at $100/month per seat versus having to pay millions of dollars using the old model. This just opened up the broader market for us.

Moving to SaaS has also forever changed our culture at Ariba. We have become a more vibrant and energetic organization that is focused on customer satisfaction. Our employees are excited about working for our company because we are a product innovator and a leader in our market.

At the beginning we felt like we were playing catch up all the time but once we reached product parity, we started to operate a different release cadence, which was really important to our overall business agility. This allowed us to break out different solutions and we no longer had to manage one large monolithic solution that just seemed to slow us down. Now we release a product every quarter.

Market analysts now look to Ariba when they are thinking about where the market is headed around Spend Management. We have even created a new market space and called it the Ariba Commerce Cloud, where we not only connect buyers and sellers but also help our customers manage their cash. The Commerce Cloud is also about how we can help customers collaborate with their sellers, using a very innovative approach. At Ariba Live, our annual user meeting, in the past would only attract a few suppliers to this event but now nearly 40% of the attendees are suppliers and they are very bought into our
SaaS products and our vision for the future.

Company:            FrontRange Solutions

Started:               2000

Located:              Pleasanton, California

Products:             Help Desk, IT Service Management, IT Asset Management, Customer Service, CRM, Voice and SaaS².

Geography:          Advanstar Communications, Amercian Stock Exchange, Chicago White Sox, City of Des Moines, Instron Corporation, SHI and Swisscom

Website:             FrontRange Website

Blog:                  FrontRange Blog

Twitter:              @FrontRange

Recent News:

FrontRange Solutions Announces New ITSM SaaS Solution

FrontRange Solutions delivers much anticipated IT Service Management Enterprise

FrontRange Solutions Announces Release of new Service Catalog Solution

I asked Kevin Smith, FrontRange’s vice president of marketing a few questions about his newly launched SaaS business and his view on the market going into 2011.

Why did you launch a Software-as-a-Service business?

Even as a large, profitable on-premise software company, about five years ago we saw a growing demand in the market for SaaS-based service management and help desk solutions. We knew from our experience that just hosting our existing products like some of our competitors had done in an ASP-type of solution wasn’t a viable strategy. It also wasn’t what customers wanted.

So we decided about three years ago to build a new product that was a pure multi-tenant solution and we have invested millions of dollars to create our new ITSM SaaS solution. When we looked at our version of SaaS, we think of it more as Solutions-as-a-Service that is included in our SaaSIT family of solutions including service desk, asset management and customer service.

What lessons have you learned in building your SaaS business?

One of the main lessons we learned was that our customers still want on-premise solutions, especially companies vertical industries such as healthcare, government and financial services.

Customers we have talked to want a hybrid model, with a single provider. They want their divisions and headquarters to be able to use either on-premise or SaaS, based on their needs, but be able to exchange information between both types of products. We believe it is possible to have world-class products across both on-premise and SaaS. FrontRange will continue to invest in both product lines and create distinct product roadmaps but also look for synergies.

We understand that SaaS is a different business model, including different products, customer service, sales, services and even training. FrontRange used a tiger team approach where we brought in key talent who understood SaaS processes in development, operations and other areas. The idea was to infuse the company with some SaaS DNA in a few important areas, and we will build up this expertise over time. We are also using partners to help us with our SaaS offerings including Amazon Web Services’ EC2 hosting infrastructure.

Interestingly we have seen a halo effect with our existing on-premise customers as a result of having a SaaS product strategy. For instance we have customers who have been using our HEAT product for many years, and had a corporate mandate to look at SaaS, so when they learned about our SaaS strategy it just reinforced their desire to stay on product maintenance.  This was attractive for existing customers using our on-premise products because they liked the future opportunity to mix and match both delivery options.  Our pipeline for new customers also contains many hybrid deals where companies want both on-premise and SaaS offerings.

We were also fortunate that our company was able to fund the build-out of our SaaSIT product suite from our normal operating income and cash over the past three years and were even still able to remain profitable.

The SaaSIT product felt like it took a long time to develop, and at it was a difficult process, but we are now excited to have a truly competitive SaaS service offering to sell.