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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.
| Term | Definition |
| ACV | Annual Contract Value of a subscription software agreement. |
| API | Application Programming Interface. |
| ARR | Annual Recurring Revenue. |
| ASP | Application Service Provider. Typically associated with a hosted single tenant software solution. |
| CAC | Customer Acquisition Costs. A key -SaaS metric that measures sales effectiveness based on how long it takes to pay back Sales and Marketing investments. |
| Churn | A SaaS measure of customers who do not renew their annual or monthly subscription agreement. |
| Cloud Computing | A utility computing method that shares many types of computer resources through virtualization and delivers an elastic computing environment over the Internet. |
| CLTV | Customer Lifetime Value. A key SaaS metric that is used to measure customer value, usually over 3 to 5 years. |
| CMRR | Contracted Monthly Recurring Revenue. A key SaaS metric that is calculated for new customers, up-sells, cross-sells and removing churning customers. |
| CoLo | Co-Location facility. A term for leasing a third party’s physical data center infrastructure, which usually includes the building, power, Internet connectivity and security. |
| Cross-Sell | A key SaaS metric measuring new software functionality or modules added to an existing software subscription agreement. |
| Down-Sell | A key SaaS metric that measures when customers remove of functionality, users or capability that lowers the CMRR. |
| Freemium | A business model in which the SaaS or Cloud Computing provider offers basic features to users at no cost and charges a premium for supplemental or advanced features. |
| Hosted Software | Single tenant software that is delivered over the Internet from either the Software vendors own data center or through a third party hosting company. |
| IaaS | Infrastructure-as-a-Service refers to a combination of hosting, hardware, provisioning and basic services needed to run a SaaS or Cloud application that is delivered on a pay-as-you-go basis. |
| Mashup | It is a web application that combines data or functionality from two or more external sources to create a new service. The term implies easy, fast integration, frequently using open APIs and data sources to produce results that were not the original reason for producing the raw source data. |
| MRE | Monthly Recurring Expenses. |
| MRR | Monthly Recurring Revenues. |
| MSP | Managed Services Provider. Usually a hosting or CoLo provider who provides a higher level of application management services (App management, monitoring, reporting, billing and call center support). |
| Multi-tenancy | Refers to a software architecture where a single instance of the software runs on a server, serving multiple client organizations (tenants). Multi-tenancy is contrasted with a multi-instance architecture where separate software instances (or hardware systems) are set up for different client organizations. |
| On-Demand | Is often used as an interchangeable term along with SaaS. |
| On-Premise | Traditional method of installing and customizing software on the customer’s own computers that reside inside of their own data center. |
| Platform-as-a-Service (PaaS) | Platform-as-a-Service solutions are development platforms for which the development tool itself is hosted in the Cloud and accessed through a browser. With PaaS, developers can build web applications without installing any tools and then they can deploy their applications and services (reporting, integration, security) without any specialized systems administration skills. |
| Private Cloud | Employs Cloud Computing principles within a customer’s own internal networks. The term implies that the same virtualization and highly flexible and scalable methods used in huge Internet-based enterprise datacenters. |
| Public Cloud | Cloud Computing conducted using the public Internet outside of any enterprise firewall. |
| Renewal | Agreeing to extend an existing software subscription agreement beyond the initial term. |
| SLA | Service Level Agreement. The contractual terms of service associated with SaaS provider’s offerings. |
| SOA | Service Oriented Architecture. |
| SaaS | Software-as-a-Service refers to multi-tenant software delivered over the Internet and customers consume the product as a subscription service that is delivered on a pay-as-you-go basis. |
| Subscription | SaaS licensing method where customers rent their software from the provider usually over a 1-3 year period. |
| TCV | Total Contract Value. Total value of a transaction as measured over the term of the agreement. |
| Up-Sell | A key SaaS metric measuring additional software functionality, users, or capacity that is sold onto an existing software subscription agreement. |
| Virtualization | The creation of a virtual (rather than actual) version of an operating system, a server, a storage device or other network resources. |
Company: Enwisen
Started: 1999
Located: Novato, California
Geography: Global
Market: On-demand Workforce Communications
Products: AnswerSource
Key Customers: Fox Entertainment, Nissan, Hershey, State of Montana, Yahoo!
Website: Enwisen
Recent News:
I asked Walter Smith, Enwisen’s Chief Executive Officer a few questions about his business and his view of the SaaS market in 2009.
Did you start out as a Software-as-a-Service company?
Yes, when we started Enwisen in 1999 our vision was to leverage the power of the Internet to deploy robust, highly configured technology for HR using a Software-as-a-Service business model. At the time the term “SaaS” wasn’t commonly used to describe our model… ASP or Application Service Provider… was the more commonly used term for a hosted application. But truly our model from the beginning was to combine software and services in a multi-tenant environment. A key advantage we have had in the marketplace is delivering a suite of products that have all been built internally as a SaaS solution without the challenge of converting from an enterprise foundation or integrating acquired solutions.
Why do your customers buy from Enwisen?
Fundamentally it boils down to compelling economic value and great service. Our technology solves a critical issue for HR – how to deliver quality service to their internal customer (employees) at a lower cost per employee. In today’s economy HR is being challenged to be far more efficient, but without compromising quality. It’s a real conundrum – high touch HR delivery and internal systems are just too expensive and ineffective. Not only do we streamline HR operations, but we improve the service experience for employees. Our solutions are very reasonably priced for the robust capabilities and bottom-line impact we deliver. Customers have to provide services to employees, it’s mission critical, we just give them a better and more cost effective way to do it. Combine that with great, highly attentive service and that’s why customers buy from Enwisen. The validation is there… despite the down economy we grew profitably at 62% during our last quarter and over the last 10 years our retention rate has exceeded 98%.
What do you see as the key trend emerging in the SaaS industry?
Collaboration and integration of various enterprise applications through the “Cloud.” Almost every company today has multiple systems and multiple service providers. Here’s an example – one system for the Intranet, one for HR, outsourced payroll, outsourced benefits, performance and succession planning, learning (LMS), and dozens of benefits providers for health and retirement. Users are simply overwhelmed by the complexity of getting to all of these different sites – how many user IDs and passwords can you remember? If a system cannot be easily accessed, it won’t be used. Companies spend millions of dollars on systems, yet most acknowledge they are underutilized. Also, many companies lock their applications behind the firewall, making it harder if not impossible for many employees to use. One of the biggest trends is to leverage the “Cloud” in a way to seamlessly integrate data and applications to make it easier for user to access everything through a single location.
What is your outlook for 2009?
Now that the fear of financial Armageddon has subsided we see companies getting back to Business 101 as usual. Companies have to continue to innovate, deliver service, retain talent, and drive greater efficiencies to the bottom line. Budgets will remain tight, but companies will continue to invest in ways that make them more efficient in the near term but also prepare them to grow and be more competitive in the long term. We anticipate our current growth rate to continue since part of our success is because of, versus in spite of, the down economy. Companies no longer will buy status quo products due to brand. They will continue to seek best of breed solutions that will give superior performance at a much lower cost even if they are a new vendor to them.
Thank you to Walter Smith for contributing to this profile.
As we enter 2009, I am hoping that the economic environment will begin to improve for technology firms. I realize that very few analysts feel positive about the economy but one thing I agree with them is that companies will have dramatically less capital to spend on technology in 2009. Forrester states that IT spending growth will only be a pathetic 1.6% and Gartner’s Peter Sondergaard, Senior VP of research, thinks that 2009 IT spend could be 2.3% to no growth at all.
What is interesting is that what growth there is, Software-as-a-Service will be one of the top spending market segments according to reports by Verizon and Gartner. The reason for the optimism is primarily because these types of types of technology investments can lower a company’s total cost of running their business. This relates to my last blog post that TCO is going to be the major driver for technology buyers in 2009.
My prediction for 2009 is that this will be the Year of the Subscription. Not that subscription-based business models are anything new, just think about the next time you pay a bridge toll, your mobile phone bill or your mortgage. The reason for my prediction is that companies are now faced with a once in a generation restriction on capital and companies are thinking more about reducing costs and how to make these technology purchases using their operating budgets. With this focus on operating expense purchasing by buyers, this will place tremendous pressure on technology firms that only sell their products through a traditional capital expense model.
Here are some simple tips to get your technology business leverage a Subscription business model:
If you are an Existing Technology company with little or no recurring revenues:
- Evaluate your business for ways to provide new subscription products, services or content to your existing customers.
- Offer a subscription pricing option to new customers that have a capital budget constraint.
- Add a premium support option that can be priced as a subscription upgrade to a customer’s existing maintenance or support offering.
If you are a SaaS company then you should consider:
- Re-evaluate your pricing and packaging strategies to maximize your competitive advantage against traditional competitors. Now is a great time to grab markeshare.
- Focus on customer satisfaction because the only weakness in a subscription model is when your customers don’t renew their contracts. Keep your renewal rates up and look to up-sell at renewal time.
- Be very clear on your company’s recurring revenue metrics; customer acquisition costs, lifetime value of you customers, and customer profitability, to name a few. You should then develop specific plans to improve and monitor these metrics on a monthly or quarterly basis.
Keep in mind that even though this will be a difficult year, but there is always opportunity in a chaotic market for innovative companies. Remember 2009 is the Year of the Subscription.
Remember the good ol’ days of selling software, when you could talk to customers about the virtues of ROI, or Return on Investment? ‘Our new software can cut your costs by 90%, make you more strategic and you will get that raise you were looking for!’
Funny thing, that was only about 6 months ago. Even Software-as-a-Service sales professionals were skilled at ROI selling but now ROI is out and TCO, or Total Cost of Ownership is back in.
The reason for the change is that buyers don’t care about investments or benefits, they are only concerned with reducing and managing costs. So this should be really good news for SaaS providers because their solutions not only provide ROI but clear TCO advantages. Some of these advantages include:
- No hardware required: web servers, application servers or firewalls
- No software required: database, infrastructure or security software
- No IT team required: DBA’s, IT managers, security guys, etc.
It seems like most companies have already thinned their workforces, frozen their budgets and trimmed unnecessary spending in an effort to reduce costs. What you are going to see next is IT Cost Swapping. This is when you start doing a line item review of all of your IT and business costs and realize that your customer is probably paying a huge amount annually for ERP maintenance to your friends at Oracle and SAP and not getting much in return. In a recent CIO magazine article about the upcoming SAP maintenance fee increase from 17% to 22%, a Forrester survey of over 200 SAP customers found that over 85% saw little or no value in these annual fees. So it is a stroke of genius to raise the costs as the economy goes into the toilet, right? Well SAP isn’t alone, Oracle is also planning on a large price increase in 2009 which could be as large as 10%. In fact Oracle said that their maintenance revenue was the most profitable component of their business, that’s because it’s pure profit!
A smart Cost Swap Strategy could involved a portfolio analysis of all of your customer’s ERP software and building a plan to replace older on-premise ERP products with up-to-date SaaS products. The advantage with this approach is that your customer can get the benefits of modern software, while actually reducing their overall IT cost structure. For more Cost Swapping ideas, drop me an email at: kevin@montclairadvisors.com.
Crazy like a fox.
With the economy in such tough shape, with customers on the sidelines with no budget to buy software, maybe now is the perfect time to embrace a Freemium software strategy. This concept was originally proposed by a venture captialist named Fred Wilson, the founder of Union Square Ventures.
This became really clear to me over the past 6 months that this trend towards free software might be the future. Initially I read a great article entitled Free! is the Future in Wired magazine (make sure you watch the Chris Anderson video), which I thought presented a very clear argument for free.
Think of all of the free software and services business models that went bust during the Internet Boom. But then again there have been many businesses that were built using a free business model including Google, Yahoo!, Skype, eBay, and Craigslist just to name a few. Some of the new kids on the freemium block include Facebook, LinkedIn, SimplyHired, Kijiji, 37signals and many of the open source software players.
My second realization of the power of free was using 37signals BaseCamp project management product. It was a great example of providing a free product that you liked so much that you had to buy into their paid version. If you need a project management tool, this one is worth a subscription and you may end up pulling out your credit card like me.
Then my third reason why I thought freemium could really be the future of software is based on working with a great company, MrTed, who makes Applicant Tracking or ATS software for large companies. MrTed just recently launched their new Small and Medium business freemium offering, SmartRecruiters, which is an Open SaaS product, which is a mashup of Open Source and SaaS business concepts. This Open SaaS model was developed by Jerome Ternynck MrTed’s CEO and founder. SmartRecruiters like many other freemium offerings is based on the development of a strong and passionate user community, who ultimately become the revenue engine for these companies. SmartRecruiters will monetize their business model by offering a collection of value-added services that are bundled with their free software.
As companies look at their 2009 business strategies, they need to balance gaining marketshare while keeping customer acquisition costs (CAC) as low as possible. By deploying a freemium software strategy now you might be considered crazy in 2009 but be laughing all the way in the not too distant future.
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