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By Kevin Dobbs
Montclair Advisors, LLC
According to Gartner, the Software-as-a-Service market is forecast to have a 15.3% compound annual growth rate through 2014 for the enterprise application markets, compared with total application market CAGR of 5.3%. It is this type of growth and adoption that is causing many traditional ISV’s to seriously consider transitioning their business models to SaaS.
This is obviously easier said, than done. According to our informal research, close to 50% of all ISV’s fail at least once before successfully rolling out a successful SaaS strategy. What is interesting is that 35% of all ISV’s are currently in the process of trying to move to SaaS according to Saugatuck Technologies. Because it is difficult, I am going to share my 12 best tips when transitioning to a SaaS business model over the next few Smart SaaS posts.
Tip #1: What Is Your SaaS End Game?
This sounds basic but it is amazing how many clients don’t really know how far they plan to go with SaaS. Will your company go all the way and convert 100% of your business to multi-tenant subscription solutions over time or will you continue to offer on premise software as well. This diagram is helpful with speaking with your team to determine where your company fits along our Software Continuum.
Depending on your strategy - traditional, hybrid, cross-over or SaaS, this should change your game plan. Keep in mind that a complete SaaS transition can take anywhere from 3-5 years to complete, so break your plan into 12 month phases. For a company just looking to launch a hybrid model, offering both deployment options, the timing for transition will be less than a company looking to do a full move to SaaS.
A new SaaS start-up takes about 5 years to break even and most venture capitalists are looking at 7 years before the company could possibly go public. On average most successful SaaS firms take about $35M in investment before they can reach an IPO stage, so you should be prepared to invest in your SaaS transition as you shift from a perpetual model to a subscription model.
There were a number of keynotes at last week’s All About the Cloud conference that focused on Public and Private Clouds and the market. What was interesting is that the typical hype associated with Cloud Computing appears to be calming down. It seems like it is no longer necessary to justify or explain the Cloud, or at least for the audience at that conference. According to Gartner the Cloud Computing market will be $150B in IT spend by 2013 as compared to $56B in 2009 and is the #1 Strategic Technology for CIO’s in 2010
The new Cloud attitude appears to be more about ‘when’ and ‘how’ enterprises will be utilizing Cloud solutions rather than ‘if’.
Coexistence is ‘In’
The other interesting change, which I first noticed at the end of last year at both OracleWorld and Dreamforce, was that everyone seemed to be talking about co-existence or hybrid uses of the Cloud with on-premise assets. This more reasoned approach is going to make more sense to CIO’s and business executives to who have spend millions building out their infrastructure over the past 10 years. Cloud can be complimentary. Starting with fringe or edge applications and then over time becoming more useful for mission critical functions.
The Consumer Cloud
Tuesday’s press panel with [insert names] focused mostly on the use of the Cloud for consumer applications like Facebook, Google, Amazon, eBay and future offerings like iTunes LIVE and Microsoft Office 2010 (launched on May 12th). Cloud is everywhere but the average consumer doesn’t even know they are in the Cloud. With the advent of ubiquitous broadband access, smart devices and massive data centers, there are all sorts of Cloud based consumer services emerging. But the market is still evolving because the Generation X’ers are plugged into the Cloud but as Kevin O’Brien from Oracle said in his session, ‘My mom still doesn’t know what the Cloud is’, and she is probably isn’t alone.
Private Clouds
There were many sessions that discussed how there is money to be made in the Private Cloud market. You can have many of the advantages of the Public Cloud without the security and control issues. IDC projects that by 2014, $11.8B will be spend on servers to create Private Clouds, considering overall IT spend in the US is approximately $1T, that’s not big percentage today, but it will be in the future.
Scared of the Cloud
Are CIO’s scared of the Cloud because of their potential for loss of control, security issues and resource impacts? Several sessions touched on this aspect of the Cloud Computing market including CIO’s creating hurdles to adoption.
Given the cost and scalability advantages why wouldn’t organizations like the State of California quickly adopt Cloud based solutions? What about the switching costs like decommissioning your own data centers, software and restructuring personnel. If you already own PeopleSoft and it is working, will you really be open to a Workday ‘rip and replace’ scenario? Enterprise organizations are warming up to the idea, just ask Flextronics.
One panelist cited a recent Google Docs deal that went sideways at UC Davis where they scrapped their trial for several thousand users. Maybe there were other considerations than the Cloud but most of the sessions agreed that the benefits of the Cloud outweigh the risks and CIO’s are starting to think in terms of intelligent trade-offs instead of just being against the Cloud. This is probably smart, given the recent economic conditions and every CEO is looking to optimize their IT spend.
Cloud 2010 and Beyond
Cloud is just the new thing. According to Bill McNee at Saugatuck Technologies, their most recent Cloud Computing survey indicated that 86% of the respondents thought that the Cloud would be part of mainstream IT by 2014.
There appears to be reasonable optimism that Cloud Computing is not a fad and its going to happen, it’s just going to be the way people are operating today in the future. The Google Docs business is adding 3,000 new companies a day, that doesn’t seem like a fad. According to Gartner, their Hype Curve for Cloud Computing showed that July 2009 was the peak and it really appears that the market is maturing about the Cloud.
Venture Capital firms are only funding Cloud-based start-ups and large technology companies like Cisco, CA and IBM are buying SaaS and Cloud based companies (like CastIron Systems) because they realize they need to overcome the ‘Innovators Dilemma’ around the Cloud. There will be an increase in successful SaaS and Cloud companies as the market continues to mature, as well as a lot more M&A activity.
As one speaker so aptly described the current market situation for many companies when evaluating Cloud Computing, ‘When a piano falling from the sky, you should be worried more about will it hit you not where it is while it is falling.’
When most companies think about moving towards a Software-as-a-Service business model they often just change their pricing model. You know the drill, instead of charging a big perpetual license fee upfront with some services and then an annual maintenance fee, you switch over to a SaaS agreement that is structured quite differently; with the subscription being spread over the term of the agreement and some upfront services to get started.
Don’t get me wrong, changing your pricing is a big deal if you are a traditional software company. By changing your pricing dynamic you are moving from a Capital Expense (CapEx) to an Operating Expense (OpEx) orientation, this is a dramatic change! It’s even a bigger deal if you are a publicly traded software company. But the overall SaaS business model is really all about monitoring and measuring metrics, ratios and statistics.
I ran into a very interesting company recently, OpEx Engine, that has done extensive benchmarking of SaaS and technology companies, and has complied a library of operational metrics for over 50 public and privately held software firms. Lauren Kelley, OpEx’s CEO is an ex- Art Technology Group (ARTG) executive who realized that smart technology people were looking for these types of real-world benchmarks and operating metrics. Lauren’s team has spent the last two years accumulating a lot of really value information. I can’t tell you how many times I have looked for good comparative metrics on how much companies typically invested in sales and marketing, research and development and G&A when building out a business model. For instance, did you know that of all of the publicly-traded SaaS companies that DealerTracker (TRAK) has the lowest R&D investment as a percentage of their revenue? (4.9%) Did you also know that Salesforce.com (CRM), Omniture (OMTR), NetSuite (N), and SuccessFactors (SFSF) all spend more than 50% of their revenues on sales and marketing? That’s an easy one but you should definately check out the free information that Lauren provides on her site.
There are many other metrics that are needed to successfully run a SaaS company but one of the most important is your overall cost of sales and marketing. Understanding what your true Customer Acquisition Costs is a critical SaaS business performance indicator. I was recently at the SIIA On Demand Conference in San Jose where I heard Josh James, the CEO at Omniture present his sales and marketing modeling methodology, that he has dubbed the ‘Magic Number’ for SaaS companies. Since it would probably justify a completely separate post, all I can say that this is a really innovative way to determine if your % of sales and marketing spend is either too much or too little. Phil Wainewright wrote a great piece on the Magic Number - When to spend cash in a SaaS business - which is definitely worth reading. What Omniture has done really well is to figure out the overall profitability of their clients, market saturation, marketing effectiveness and the number of Quota Bearing Sales Reps (QBSR’s) that are required to grab market share. It’s cool.
Other sources of good SaaS market information and metrics are:
TripleTree, a boutique investment bank which conducts some solid SaaS research, Cutter Consortium, Saugatuck Technologies, and Jeff Kaplan’s firm Think Strategies.
If you hear of any other good ones, let me know.
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