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.

As the economy continues to struggle, it also presents some interesting opportunities for stronger SaaS companies to pick up marketshare and eliminate competitors.

In a deal announced last Friday, Xactly - the leading SaaS company in the Sales Performance Management (SPM) market, acquired Centive in an all stock deal.  Centive is a long time player in the SPM market with many large customers and a gradually improving subscription revenue stream.  The company has been on a slow transition to an on-demand model for the past few years.  When I heard about the deal I thought about the old addage, ‘If you can’t beat ‘em, join ‘em’.  By combining the two firms, Xactly now increases their overall size and revenue footprint, adds new clients and gains a substantial East Coast presence, since Centive is based in Boston.  What was also announced is that Xactly will support the Centive platform for 18 months but will migrate all of the existing Centive customers to the new combined Xactly platform, which is a very smart move.  Don’t support two or more platforms, ever!  Consolidate the technologies now, you will save money and it is the only way the acqusition will make financial sense over time.

What is really happening in the background is the stage is being set for the main event, which is the battle for the control of the SPM space between Xactly and Callidus (NASDAQ: CALD) some time over the next 12 -18 months.  Callidus has been in the market for many years and in fact, Chris Cabrera, Xactly’s CEO is a Callidus alumni, so it will be interesting to see how this plays out.

Callidus has been diligently trying to move to an on-demand model for many years but their legacy of highly customized, on-premise deployments will be difficult (ie. impossible) to convert to a real on-demand solution.  Or put another way, I doubt their customers will want to re-buy their on-demand system from Callidus, because once it is installed and working, you really don’t want to touch it again.

Smartly, Xactly has used the recession to their advantage.  This is just the first of many deals as the Software market will begin a period of very active consolidation during 2009.