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:            Hewlett-Packard

Started:               1939

Located:              Palo Alto, California

Geography:         Global

Products:             Offers a portfolio that spans printing, personal computing, software, services and IT infrastructure solutions

Website:              HP Website, HP SaaS Website

Blog:                   Grounded in the Cloud

Twitter:              @HPSoftware

Recent News:

HP’s Bill Veghte to Deliver Keynote Address at RSA 2011 Security Conference

HP Joins the White House in Fueling Innovation and Entrepreneurship

HP Drives New Era for Cloud Computing

I asked Kevin Bury, general manager of HP Software-as-a-Service solutions a few questions about his SaaS business and his view on the market as we start into 2011.

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

We are saw a lot of interest in SaaS and the Cloud as our customers were looking for ways to get the most out of their IT budgets.  When we looked at what companies were doing with SaaS, it gave them the ability to outsource non-core applications, operate more efficiently, all while taking advantage of Cloud-based technologies.  Our customers kept asking us what HP was offering as-a-service?  That was a big driver.

Actually HP has a lot of experience with SaaS as result of purchasing several subscription-based software companies including Mercury Interactive, Peregrine Software and Opsware.  HP is the sixth largest software company and our percentage of pure SaaS software revenues is large. Our goals over the next few years is to increase our SaaS revenues by 4x and our subscription bookings by 100%.

Everyone from the CEO down believes in the importance of SaaS and Cloud Computing on the future of HP’s business.  Our movement to SaaS and our organizational transformation is starting inside of HP’s Software division but we don’t want to leave SaaS out on an organizational island.  We experimented with a couple of concepts but ultimately we decided on a broader approach that has us transforming our entire software business.  We plan to make significant headway with our SaaS transformation over the next three years.

What lessons have you learned in building your SaaS business?

Our approach to SaaS is transformational and we want to move from our current Business Technological Optimization (BTO) structure and offerings, which are mostly on-premise to more of an as-a-Service set of solutions.  We will take our existing license and services and build them into more a consumption-based model for our customers. This is really a result of trying to look at IT challenges from the customer’s perspective.  So we are now designing solutions that allow our customers to consume our software in a way that makes the most sense to them.

By Kevin Dobbs

Montclair Advisors, LLC

By Kevin Dobbs

Montclair Advisors, LLC

One of the questions that I get quite often from firms that are starting down the path towards selling SaaS solutions, ‘should we use the same sales team to sell both our on-premise and SaaS solutions?‘ It seems like this would be easy and you should be able to definitely leverage your existing sales team to penetrate not only prospective accounts but also with existing customers.

No one wants to re-invent or re-invest in building out a new SaaS-specific sales team but this is critical to building out a successful SaaS business.  What many executives overlook is that SaaS is not just a delivery model but it is really a truly different business model.  I thought it might be helpful to use this table to illustrate those business model differences and why creating a specialized sales team is necessary.

Let’s review some of these important differences in each sales approach and how it affects the typical software sales rep:

Value Proposition: Traditional software is sold to solve a targeted business requirement and then customized to meet the specific needs of a customer.

SaaS takes a different approach.  It is usually sold with the promise of lower costs, more rapid time-to-value and ease of use.  This is accomplished using a standard system and configuration that is not tailored or customized for each customer. These are two very different value propositions and would be hard to expect every sales rep to be able to master both sales strategies.  Keep in mind that these two value propositions also appeal to two very different buyers; business buyers and IT.

Procurement:  Similiar to the value proposition, positioning the value of of a subscription purchase versus the actual purchasing of a software license are quite different.   After the recession, and part of our new normal economy, most organizations are now leading with a the requirement of subscribing to software instead owning it.  This allows customers to keep their more cash on their balance sheets and longer term, save on hiring staff to manage their internal systems inside of their own data centers.

Sales Cycles: Customers are also looking for just enough software to get the job done and are not usually looking to purchase a lifetime’s worth of functionality anymore.  They want to purchase a small piece of functionality now and then grow their relationship with their software provider over time, once they know the software works and they are comfortable with this relationship.  This means that SaaS sales cycles are going to be much shorter than traditional, on-premise software sales transactions.

Transaction Sizes:  Because of the different buying behaviors associated with SaaS from traditional software, SaaS transactions tend to be much smaller.  This means that a SaaS sales rep is going to need to close more deals, more frequently in order to make the same quota target that a perpetual license sales rep is assigned.

Pricing:  Putting together proposals are always difficult, but asking a sales rep, or even sales management, to offer both license and subscription options is really complex.  I think this is also not a great idea because it ultimately confuses the customer, since they will try and normalize the pricing for both options, which is hard to do.  Comparing a SaaS solution to an on-premise perpetual license is like comparing apples to oranges, and your sales team needs to pick one of these solutions and really learn how to sell it.

Methodologies/Touch:  Best-in-class SaaS sales organizations is a laser focus on Customer Acquisition Costs (CAC).  Living with the reality that the majority of your revenues will come in over the life of any contract, it is imperative to keep your sales costs low.  A SaaS model doesn’t lend itself to using the high-touch sales model, or engaging the ‘cast of thousands‘, to come in and get deals done.  Most SaaS firms operate a lower-touch model using tele-sales, remote demonstrations, and many automated self-service tools to assist the sales team in getting deals done quickly.

Channels: Effective use of indirect channels is another way of lowering customer acquisition costs.  Although some traditional software companies use channel partners to sell their products, it appears that the use of channels is really gaining popularity among SaaS providers.  Many SaaS firms are complimenting not only their tele-sales capablities but also using partners to deliver value-added services as well.

Demos:  Another way of reducing the cost of sales is to be more selective and smart about how customers are exposed to a software providers’ solutions.  This is usually accomplished by showing the software either using a Web-based conferencing service or some type of self-service environment.   This is quite a different approach than what was done with on-premise software, which was done in person and using a highly scripted demo.

Trials:  In the past, if a customer wanted to get their hands on the software and really use it, the only way that can be accomplished was with a Professional Services team and a conference room pilot.  Most SaaS companies allow prospective customers to play with their products by offering them a 30-day trial, after a simple self-service sign up and a quick tutorial.  This automated approach is cost effective and allows a SaaS firm to manage potentially hundreds of product trials with very little support personnel required, and this is a great source of qualified leads.

Renewals & Customer Relationships: This is another contrast between the two models. In a traditional software company the customer relationship is usually dispersed among various functions including Sales, Support and possibly Professional Services.  In SaaS firms the customer relationship and the renewal process are both very important, and usually have clear ownership, usually with the Account Management organization.

When you consider all of the differences in these two approaches to selling traditional software and software as a service, it is not reasonable to have the same reps trying to master selling both options.  The best sales reps are always focused on selling, hitting quota, and earning commissions.  Sales reps will sell what they are comfortable with and when considering a SaaS transition, it is best to create separate teams, with one that can specialize in the SaaS value proposition, solution, sales methodology and can make money on the SaaS-specific comp plan.

When firms make it simple for their reps to sell, you will get the sales momentum you are looking for in all of your lines of business.  You don’t want your sales reps to be the ‘jacks of all trades and masters of none‘, because that isn’t the formula for SaaS sales success.

By Kevin Dobbs

Montclair Advisors, LLC

When thinking about your transition to SaaS, there are many questions to consider including target customers, value propositions, packaging, pricing and how best to build customer relationships.

After conducting more than 50 Smart SaaS business profiles of all different types including pure SaaS, Hybrids and Cross-Overs, all of these companies would probably answer many of these types of questions differently depending on their type of customer, functionality, geography, vertical markets and the only way they can get useful answers is to continually test everything.   Best in class SaaS firms are always trying different pricing, packages, messages in order to optimize their businesses, like a recent firm we profiled - Clarizen.

Some resources when thinking about these types of considerations include:

Software Pricing Partners - Jim Geisman

Chaotic Flow - Joel York

SaaS Blogs

Sixteen Ventures - Lincoln Murphy

4 Pillars of SaaS - Phil Wainewright, ZDNet

In addition to testing, it is a good idea to measure everything including website traffic, marketing campaigns, product usage, customer satisfaction and a myriad of other SaaS and business metrics.  Again, the best firms track and monitor all the key business metrics in order to improve their ability to generate revenues, build market share and reduce unnecessary customer churn.  SaaS requires a very tight operational model and has moved business an art to a science and now there are an entire new class to tools to improve revenue performance and reduce costs.  Some of these next generation of tools include:

Sales Automation

EchoSign - Provides electronic signature and contract management.

InsideView - Sales business intelligence and social media platform.

JigSaw - Business information and data services.

NetSuite - CRM and ERP suite.

RightNow - CRM, call center and social platform.

Salesforce.com - Salesforce is not only a solid Customer Relationship Management system but also a great system of record for all types of sales, marketing and service information and applications. Also offers a application marketplace that provides value added extensions.  Salesforce also offers Chatter a collaboration platform to improve internal communications.

SugarCRM - Open source based CRM that provides a robust no cost solution.

Marketing Automation

Eloqua - Marketing automation platform.

Genius.com - Sales and lead automation.

MarketBright - Marketing and lead generation management.

Marketo - Marketing and revenue management.

Pardot - Business to Business lead automation.

SaaS Analytics

Birst - On demand business intelligence product.

Cloud9 Analytics - SaaS performance management.

GoodData - SaaS business intelligence product.

PivotLink - On demand business intelligence product.

Using many of these tools companies can help a SaaS firm track their business, sales and marketing performance.  The question that I often get is ‘what should I be tracking?’  There are an emerging set of SaaS-based business metrics that include Monthly Recurring Revenues (MRR), Churn, Customer Acquisition Costs (CAC), The Magic Number (MN) and others that provide very precise views into how a SaaS business is performing.  Here is a chart that details some of the more common SaaS business metrics by functional area:

Other resources to learn about SaaS metrics;

5 C’s of SaaS Finance - Bessemer Ventures

Chaotic Flow - Joel York

For Entrepreneaurs - David Skok, Matrix Partners

Haut Tech - Michael Dunham at Scio Development

My opinion about the SaaS business model is that there are a lot of new considerations about building a profitable subscription business today.  The buyers are different, there are many robust low-cost tools available, Cloud technology that can radically change your cost model and time to market as well as many other business factors, so the only real way to really tune your business for SaaS is to continually test everything!

I would be interested in your comments and hearing about what you are testing.

Stay tuned for Tip #4 Sales & Marketing on a Budget

By Kevin Dobbs

Montclair Advisors, LLC

Let’s face it, Hunters and Farmers are very different types of sales people.  One is into the thrill of the chase and the high anxiety of selling the next big deal.  The other is into cultivating relationships, building communities and patience.

When it comes to sales people inside of a SaaS company, these same attributes apply to this team as well.   Trying to get your major account or direct sales reps to effectively manage your existing accounts and still hit an aggressive quota, that usually doesn’t work that well.  The same holds true if you are trying to get your account managers to push their customers to close a big deal, and they just don’t want to push too hard because they might ruin their relationship.  Then why are you trying to get them to do the same job?

The other big difference is usually how these sales professionals get compensated.  A typical software sales rep will have a $1.5-$3M annual quota and want to make at least $200K, where as an account manager might have a much smaller quota, $300-$750K and be making $110-150K.  That’s because they have different skill sets but both types of sales are critically important when building your SaaS sales team. Philippe Botteri from BVP discusses what Gary Messiana an EIR told him about how he compensated his reps for delivering MRR:

• • For 0-25% of the quota, $0.25 commision per $1 of MRR
  • For 25%-50% of the quota, $0.5 per $1 of MRR
  • For 50%-75% of the quota, $1.0 per $1 of MRR
  • For 75%+ of the quota, $1.5 per $1 of MRR

I like the simplicity of the concept and it can be applied to all types of sales roles.

Depending on the type of products/services you are selling, you may actually not have high priced outside sales reps and actually focus more on building out a low cost tele-sales capability.  Even if you do this, you should still separate out your new sales team from your account management teams.  Because SaaS is perfect for the ‘penetrate and radiate‘ sales model, you need teams that can sell that first product and then another team that keeps the customer happy and renewing as well as buying more products and services.

Bessemer Venture’s  10 Laws for being SaaSy also recommends separating your hunters from your farmers.  It is important to be able to find new customers but it is also important to be able to renew, upsell and cross-sell customers additional products, which will increase your company’s Monthly Recurring Revenues.  This well defined sales structure works well with many of the leading SaaS firms including RightNow and Salesforce.com.

One of the big objections about this type of approach is that if forces the customer to deal with two different sales teams.  Although this can be a problem, I have found that these types of channel conflicts can be remedied by using team based compensation plans that have everyone getting paid based on shared goals related to existing customers.  This type of approach also encourages development of up-sells/cross-sell opportunities by the account management team, since they often require the new sales team to engage in these deals and close them.  The team compensation approach means everyone wins, including the customer.

I keep coming back to skills and personalities when structuring your SaaS organization.  Keep your teams small and focused.  Make sure you have ways for those promising team members, who might start out in tele-marketing or account management, to have a path to progress up the sales food chain.  Just make sure that your organization structure is well defined, there are clear rules of engagement and that that compensation plans encourage your sales teams to work together and keep your customers satisfied.

Stay tuned for Tip #3 Test Everything

On a recent client engagement I was asked to provide a simple set of definitions for basic terms and concepts around Software-as-a-Service and Cloud Computing (which I often use inter-changeably).   What was interesting is that there is a lot of buzz out there but I can see why people get confused because there isn’t a standard set of definitions.

So my Friday contribution to the SaaS industry I am publishing the Montclair Advisors’ SaaS Glossary of Terms.  I would be interested in your feedback on the definitions and if I miss any key ones.