1
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
During this period of time most SaaS companies sold their products based solely on their Total Cost of Ownership or TCO benefits. It was possible to make a strong case around shifting the software buyer’s costs from their capital budgets to their operating budgets, and this was attractive since most businesses were focused on conserving their cash. This is why leading SaaS firms like Salesforce.com and SuccessFactors enjoyed very strong Compound Annual Growth Rates, usually in excess of 40%, even during the depths of the Great Recession.
A subtle benefit that buyers started realizing was that purchasing a software service was that all of the required software support and management costs like facilities, hardware, power and even staff, were no longer needed. So companies could take fixed costs associated with facilities, infrastructure and staff and make them a variable expense by purchasing SaaS. This is a powerful benefit because if the economy is bad then it is easy to dial down the costs and use less of the service and if things get better, then it is easy to add more capacity or functionality. This shifting of fixed expenses to variable expenses continues to be popular among software buyers even now, given the instability in the economy.
As more businesses continue to look for ways to streamline their costs and improve overall agility, SaaS products are a nature enabler but buyers are starting to become more skeptical of blanket TCO savings claims. Smart SaaS firms classify their product’s cost savings and business benefits in more of a tiered business justification framework that allow the software buyers to more easily build their own internal business cases. By structuring costs and benefits in this way they have been able to retain their credibility during the sales cycle.
Here is an example of a simplified tiered cost/benefit structure for a SaaS product purchase that we have used with several of our software clients. Costs are classified into hard costs, or as CFO’s refer to them as ‘real costs’ and then there are soft costs which are more productivity-based benefits. Then there are strategic benefits that are not necessarily cost-based but provide additional benefits at a higher level. Some of these may actually be revenue opportunities or ROI-based benefits.
Hard Cost Savings
- Headcount
- Facilities
- Hardware
- Power
Soft Cost Savings
- Improved user productivity
- Faster cycle times
- Better reporting
- Transactional accuracy
Strategic Benefits
- Move fixed costs to variable costs
- User adoption and engagement
- Improved collaboration
CFO’s at companies that are buying software often follow a similar type of internal justification framework for purchases even of SaaS products. The key is not to lead with an ROI-focused sales approach but more with a lower cost of operations and some additional benefits approach.
Remember that most companies are also looking for ways to free up capital that can be re-purposed towards innovation. In fact, the larger the buyer, they probably have a lot of fixed IT costs and they are looking for creative ways to move some of these frozen capital investments over into new revenue producing projects. As growth flattens out across the economy, all companies will need to come up with new products and services that will create a new demand stream that will increase growth rates. [Think iPad] Leveraging SaaS solutions is not only a great way of reduce existing operational costs, but this type of investment can also act as a catalyst for new innovation and growth opportunities. Is an attractive theme for C-Level buyers in today’s market.
In summary, most organizations buying software today are not very focused on the ROI-types of benefits that were commonly sold during the last ten years. Keep in mind that even a pure-TCO sales approach will be attractive to most buyers who continue to look for ways to lower or control operational costs. The real winning formula to position your SaaS solution in a way that combines the TCO-saving theme with the ability to free up new funds for innovation. This approach is even more potent when the SaaS product can actually be an innovation catalyst for creating new products and services. The good news is that SaaS solutions can be positioned just for cost control (TCO), improvements in operational efficiencies, even increasing revenues (ROI) as well as a catalyst for innovation.
Workday 13 Update
Workday provided a preview of the latest product update, Workday 13 at the end of April. This appeared to be a major release of functionality across their entire ERP suite including Workday HCM, Workday Payroll, Workday Initiatives (Work Management), Workday Financial Management, Workday Spend Management as well as some new user experience capabilities.
This was the first update we have received in about two years so it was really impressive to see how much progress the company has made not only with their products but also with their overall business. Here are some key facts:
- 200 customers and more than 130 of them are live
- Flextronics have over 100,000 employees using their systems
- Over 1,000,0000 employees are using their various products across their customer base
- Targeting an IPO for the second half of 2012
- Releasing about 3 updates per year, compared to 1 every 18+ months for their ERP competitors
Workday HCM
New capabilities include compliance functionality related to the new US healthcare regulations which will touch benefits, employee data as well as compensation. These HCR regulatory changes also have a major impact on workforce cost so Workday is also delivering functionality related to better managing salary data for benchmarking, compensation and overall manager decision support.
As I mentioned, the last time I saw a Workday product demonstration, they didn’t very much in the way of talent management functionality but that has really changed. They now have compensation planning, performance management, succession planning and competency management. They have wrapped these capabilities in a robust in-line analytics and decision support framework. This framework includes pre-packaged reports and some really slick user interfaces for workforce management. This screen shot is of their 9-box interface for their succession planning product. What I thought was really cool is how they have integrated their position management and organization charting capabilities right into this 9-box interface for their Talent Matrix. These capabilities look very competitive to most of the other leading SaaS TMS players in the market.
For capabilities that they don’t currently have in the their talent management products like recruitment they will continue to partner with leading specialists like StepStone (now Lumesse) who acquired MrTed and Taleo.
For learning management they have built an intelligent interface into Plateau (recently acquired by SuccessFactors).
When they demonstrated the Workday 13 product, the one thing that popped out at me was the user experience and how engaging it was. The user interface appeared to quite flexible, allowing the user to drill down, or across to access important information, as well as the use of compelling charts, graphs and dashboards. I thought it was interesting to see how an object oriented architecture can really impact the overall usability of your SaaS products.
Workday Payroll
For an ERP system it is very useful to provide a payroll solution to tie into. Workday’s product has been built from the ground up to be a SaaS-based payroll solution. Workday Payroll was launched in 2009 and supports US based payroll requirements. The news for Workday Payroll is a new partnership with OneSource VHR for payroll co-sourcing services such as payroll settlement, tax and garnishment administration. These are common requirements for organizations with very large workforces.
Workday 13 still offers integrations into third-party payroll providers and payroll aggregators such as Patersons and ADP.
Workday Mobility
Seems like every HR software company is now offering a mobile application for users. The news in this area was the announcement of limited availability of Workday for the iPad. Again, one of Workday’s strengths is user interface design and this product is no exception. The product is not intended for heavy transactional use but more for the executive or manager that wants to easily browse through talent profiles, monitor their Chatter-like personal Workday Workfeed or gain insight into their workforce by running a report or analytics. The general availability for Workday for iPad is planned for Workday 14.
Overall, I thought that the Workday 13 release contained some useful improvements and the product is really impressive. Given their 3 times a year release cycle, they will continue to innovate at a brisk pace which will be difficult for the traditional ERP competitors to keep up with. Also, their laser focus on usability will also become a huge differentiator when looking at incumbent solutions, as long as Workday can deliver the necessary functionality and security that enterprises are going to continue to demand.
Mercer HR Outsourcing and Consulting Briefing
Mercer provided an update on their HR outsourcing, talent management and consulting products and services for 2011. Mercer is a major player in the overall Human Capital Management and Health and Benefits markets with total revenues at $3.5 billion, 27,000 customers, and over 4 million employees using their solutions. Here is a quick take on some of the interesting things that they are up to.
Mercer Outsourcing
Mercer’s global outsourcing leadership provided an update on their business that includes their Total Benefits and point solutions outsourcing offerings. The company has made an important shift from the broader HRO market to focus more on their strength around Total Benefits Outsourcing or TBO. Mercer’s outsourcing clients make up 80% of the US Fortune 500, so they are very strong at the high-end of the market.
In a recent announcement Mercer is now partnering with SAP in Germany for their pension administration. This partnership will allow SAP to deliver a robust pension solution to their large German and multi-national customers including organizations like Dow, Rockwood Holdings and J.P Morgan.
Mercer has made a major investment in building out a very high quality offshore processing center in India, their Global Operations and Shared Services center over the past 2-3 years. The key to making this offshore capability work is that Mercer isn’t just outsourcing benefits work to a partner, the GOSS employees are Mercer employees and part of their core delivery teams. Today this service center handles only back office and delivery functions, at a much lower cost than could be achieved from US-based resources. This positions the company to offer lower cost TBO solutions to mid-market sized organizations. Mercer also doesn’t offshore their call center or employee-facing functions to India at this time, due to possible concerns from their customers, these functions are still handled by US employees.
Mercer’s Americas operations provided an overview of their business which is primarily based on their TBO platform. Mercer’s Health and Benefits business capabilities include defined contribution, defined benefits, health and benefits and absence management. Their TBO business typically services clients with at least 7,500 employees and more than 80% of their new clients are leaving existing benefits engagements with other industry providers. Unlike competitors, Mercer’s Americas TBO business has very high customer retention rates, in excess of 95%.
Human Capital Connect
Recently launched their integrated Performance and Rewards solution built on top of PeopleclickAuthoria’s SaaS-based talent management platform. This solution has been infused with Mercer’s rewards best practices as well as a link to their ePRISM compensation management technology. Mercer clients and prospects like the idea of leveraging the company’s extensive embedded intellectual capital, integrated into a leading a TMS SaaS platform to help them deliver faster and better HR transformations.
The initial uptake on the offering has been a little slower than they planned but are now seeing stronger momentum and should be able to announce some new wins in the second half of this year.
Mercer WIN
Mercer’s Information Products team previewed their upcoming product called the Workforce Information Network that is a new rewards analytics platform that accesses Mercer’s vast warehouse of compensation and job family information. Mercer has compiled comprehensive data from more than 20 million employees and 8,000 organizations globally.
The Mercer WIN offering is now in beta, with 50 charter clients, and the company is planning to expand the offering to service up to 10,000 users by the end of 2011. The plan for 2012 is to broaden the available data sources to include survey data from other providers along with other Mercer data, that will them to deliver libraries of benchmarks for pricing, reporting and survey submissions. These tools will allow their clients to deliver more competitive pay programs segmented by regions and against their peer groups. Over time this data can be shared among other Mercer offerings including ePRISM and with the Human Capital Connect product set.
This potentially is a very interesting subscription service based on a large data asset that Mercer has been sitting on, that could be made available to all of the company’s clients over the next few years.
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:
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.
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?
|
Company |
Business |
Market Cap (000’s) |
|
On-line Groceries |
$1,200 |
|
|
On-line Pet Supplies |
$ 325 |
|
|
Marketing |
$5,400 |
|
|
Delivery Services |
Private |
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:
|
Company |
Founded |
Business |
Ticker |
Market Cap (000’s) |
|
1994 |
eCommerce |
$76,380 |
||
|
1996 |
eProcurment |
$ 3,140 |
||
|
1995 |
eCommerce |
$39,370 |
||
|
1995 |
Communications |
$ 1,340 |
||
|
1997 |
eCommerce |
$23,790 |
||
|
1996 |
Health Content |
$ 3,150 |
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 1/12th 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:
|
Company |
Founded |
Business |
Ticker |
Market Cap (000’s) |
|
1997 |
$ 1,560 |
|||
|
1997 |
Education |
$ 1,280 |
||
|
1993 |
Travel & Expense |
$ 2,960 |
||
|
1999 |
Talent Mgmt |
$ 855 |
||
|
1995 |
Marketing |
$ 1,000 |
||
|
1998 |
Search, PaaS |
$187,000 |
||
|
1987 |
Talent Mgmt |
$ 622 |
||
|
1998 |
ERP |
$ 1,880 |
||
|
1997 |
CRM |
$ 1,030 |
||
|
1999 |
CRM, PaaS |
$16,930 |
||
|
Servicesource (2) |
1999 |
Service Mgmt |
$ 774 |
|
|
2001 |
Talent Mgmt |
$ 2,990 |
||
|
1996 |
Talent Mgmt |
$ 1,430 |
||
|
1990 |
Payroll |
$ 1,490 |
||
|
1992 |
Marketing |
$ 478 |
(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: 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.
As part of Montclair Advisors‘ SaaS strategy work with several of our clients over the past couple of years, we have learned quite a bit about the specific requirements for large and small manufacturers who are evaluating SaaS-based ERP and MRP solutions. For many reasons, the manufacturing community has been slow to respond to the SaaS and Cloud Computing revolution. One of the main reasons we found was that because many small factories operate in low-cost regions of our country or the world, many don’t have reliable access to the Internet, which would render SaaS solutions useless. But things are now changing and there are a whole new set of SaaS-based ERP solutions emerging on the market.
We were pleased to review a recent blog post by Derek Singleton at Software Advice, where he does a very good job of reviewing some of the latest ERP products that have made the move to the Cloud including Epicor, Infor, NetSuite, Plex and SAP Business ByDesign.
It is a great read.
Enjoy.
Kevin
Manufacturing software vendors are making aggressive moves to the cloud. In the past year alone, four vendors rolled out full suite Software-as-a-Service (SaaS) offerings for the industry. That brings the current tally of full-suite SaaS players in the manufacturing arena to five: Epicor Express, Infor SyteLine, NetSuite, Plex, and SAP Business ByDesign.
The buzz around the cloud has manufacturers asking if a cloud solution is right for them. To help answer that question, I’ll explore the features and functionality each vendor offers, and the ideal target market for each. Many more vendors are redesigning their software for the cloud, but I thought I would spotlight the five that are already there.
First, here’s a brief introduction to the vendors.
In May of 2010, Epicor released Epicor Manufacturing Express Edition (Epicor Express), the SaaS version of their Epicor 9 product. Their SaaS offering was designed specifically with smaller job shops and manufacturers in mind. Currently, 70 of Epicor’s 9,500 manufacturing clients are working in the cloud on Epicor Express. The product is currently targeting a 20 to 30 day period to go live. That should be attainable for small job shops without complex data migration needs.
Infor moved their flagship SyteLine product to the cloud in October of 2010. Of their 70,000 customers, mostly manufacturers, 800 have put some of their solutions in the cloud. Infor takes pride in the flexibility of their .NET architecture and their ability to serve mixed-mode manufacturers. In future releases, Infor plans to expand multi-site capabilities, and expand their mobile applications.
NetSuite began pursuing light assembly and less complex discrete manufacturing customers in 2007. In June of 2010, they launched their first full-suite manufacturing offering to target mid-market manufacturers. As a pure SaaS company, NetSuite’s manufacturing clients all operate in the cloud. NetSuite currently supports multiple sites, multiple languages and currencies. In future releases, they plan to expand upon this functionality and target more complex manufacturing industries.
Plex was the first SaaS player to target the manufacturing industry with their 2001 cloud-computing debut of Plex Online. At their start, Plex targeted the automotive industry. Since then, the company has expanded into several other verticals. As a pure SaaS vendor, all of Plex’s 589 manufacturing clients are in the cloud. Future releases will focus on expanding global capabilities, and developing functionality for more vertical manufacturing markets.
The July 2010 release of Business ByDesign 2.5 marked the on-premise ERP powerhouse’s first SaaS move into the manufacturing market. The product hosts 250 customers, but we don’t have a detailed count for how many customers are manufacturers. Regardless, SAP has tremendous manufacturing domain expertise to incorporate into the product over time. In future releases, SAP will focus on expanding their functionality to cover mixed-mode manufacturing and engineer-to-order.
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Company: FrontRange Solutions
Started: 2000
Located: Pleasanton, California
Geography: Global
Market: IT and Infrastructure Management Solutions
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.
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