ServiceSource is a leader in an emerging field called Service Revenue Management, which for most technology companies refers to management of their ongoing subscription maintenance streams.  The company offers a technology platform and a suite of applications, as well as a managed services capability for some of their largest technology customers.  Some of their recognizable customers include Adobe, Cisco WebEx, NetApp and Xactly.  Montclair Advisors did a Smart SaaS Business Profile on ServiceSource in 2011 that provides background on the company, their strategy and product portfolio.

Last week I visited the ServiceSource offices in San Francisco to get a sneak peak of their new Avalon platform. Avalon is ServiceSource’s next generation SaaS platform that will pull together multiple capabilities including a beautiful new user experience, integration services with other leading Cloud platforms, a connected ecosystem of ServiceSource managed services and their continuous intelligence capability.

I was very impressed by their new user interface, its very clean and uses info-graphics metaphors along with in-line analytics to create a very easy-to-use, and understand product.  The graphics were elegant and provided a lot of drill down and mouse over information for the user.  Because ServiceSource is using HTML5, this interface is available on mobile devices as well as through a standard web browser.  The charts and graphs are all available inside of the product, which makes it easier to use than other CRM-like systems. The design point was to create a system that offers a walk-up interface, one that required little or no training for the users.  Here’s a screen shot of the new user interface.

Another unique aspect to the product is that there is a near real-time data warehouse that feeds the analytics for Avalon.  For example, when their customers are comparing their renewal rates against the industry or even their peer group, they will be looking at really fresh data.  It is common for most aggregated data of this type to be compiled and delivered in a quarterly or in some cases a monthly basis. So this continuous intelligence capability may deliver a competitive edge to ServiceSource customers because the information is representing how the company is operating right now. For most SaaS companies, it is difficult to gather service revenue-related data about their business on a continual basis but with this aspect of the ServiceSource Avalon product, it will make it really straightforward because it will be delivered through easy-to-use metrics and dashboards.

ServiceSource is using a very modern Cloud infrastructure for their Avalon platform.  The infrastructure is build on Node.js and Amazon Web Services, which is interesting because I haven’t seen a lot of enterprise software vendors building their next generation platform on the Amazon infrastructure.  There are clearly some scalability and elasticity advantages to using the AWS platform for a SaaS offering and ServiceSource is using many of these capabilities.  The company also has a strong Avalon development team with some ex-Coghead alumni leading the efforts.

With their new user interface and the flexibility they are building into their SaaS platform, it may be very easy for the company to allow their customers and prospects to ‘try before they buy’ new software modules and capabilities.  I believe that this inherent flexibility, for this type of application suite, should really increase user adoption and consumption levels, which should help ServiceSource continue to renew their customers and sell them additional products and managed services.

The Avalon service will be generally available later in 2012.

At Montclair Advisors I work with many different types and sizes of software firms that are jumping into the SaaS business model for the first time.   Here are a few tips that I would tell a new client who is looking to get into the SaaS business in 2012.

Think “Whole Product”

A SaaS offering is more than just software, it is also the services to get the product up and running, training, support, the infrastructure and security.

For most SaaS firms, they really view their platform as synonymous with their company’s overall brand, which includes more than just the technology. This brand promise is a product experience that is smooth and consistent. It also takes into account issues like business continuity and being able to quickly restore systems and data after an outage. This also means that SaaS offerings must understand and how to properly manage security and compliance concerns for large, complex customers.  In some cases this promise needs to do a high level of monitoring and even anticipate and correct problems before they occur.

When considering the professional service component of a SaaS offering, there should be extra focus on efficient provisioning and on-boarding of new customers. It is important to make this initial experience quick and easy in order to improve the customer’s overall time-to-value. By combining many customer-facing functions like support, training and service into a Customer Success team is also another popular way of trying to deliver a positive ‘whole’ product experience.

Focus on Adoption and Consumption

The economics of SaaS requires both a high rate of new customer sales combined with a better than 90% renewal rate for the financial model to work. The trick that the really fast growing SaaS firms have discovered is that up-selling additional capacity and cross-selling new products not only increases top line revenues but also improves overall Customer Acquisition Costs (CAC) and business margins.

The objective in any software company should always be to build a satisfied customer-base, but in the SaaS model you can’t stop there, it is important get customers to actively use and adoption the product. When a product is easy-to-use, intuitive, being used every day, and built on a solid platform, then it can become viral. Viral products like DropBox, Yammer and Salesforce.com’s Chatter can throw off high marginal add-on sales, that can boost a SaaS company’s revenues very quickly. This type of product consumption is important for all SaaS company’s even if the use of their product may never go viral.

It’s All About Growth

Many new SaaS firms spend a lot of time and capital building out their products, which makes sense. Often they underestimate the amount of effort and focus required to build a high growth sales and marketing machine. Because it is hard initially to jump start the recurring revenue model, it is important to develop a highly productive sales methodology, usually based on a ‘land and expand’ approach. For the most successful SaaS companies (SuccessFactors, Salesforce.com, Workday), an aggressive Compound Annual Growth Rate (CAGR) is imperative to building a profitable company.  Many of these firms, even though they are large, are still growing at 30-50% per year.

In order to build this sales and marketing engine, it requires a meaningful investment in lead generation, a sales organization that separates hunters from farmers and has a set of metrics that are tracked at least weekly. For ISV’s that are moving to a SaaS model, don’t co-mingle the SaaS and non-SaaS sales teams. Each sales team should be very focused on selling a single type of product or a single function. For example, having a SaaS team that focuses on selling only new SaaS deals, another is only doing renewals or up-selling.

Because products and markets are different, it is important to constantly be testing lead generation, pricing, packaging and sales processes in order to find the best one that works for your business. If something doesn’t work, stop doing it, and pivot to another idea. The best SaaS companies are always testing and trying to improve their revenue generation processes.

Optimize Cost of Goods Sold

Most SaaS executives are focused on their COGS and how best to optimize them. This is why many early SaaS firms use free open source software and Infrastructure-as-a-Service providers to build out their platforms, or outsource components of their business to partners to save money. The best way to optimize COGS is to reduce the number of people required to on-board, provision and operate your SaaS platform. It is better to automate as many of your processes as possible, which not only saves precious capital, but also can often improve the overall scalability of the business.

One the best examples of this type of automation is with the popular commercial SaaS storage solution DropBox [Check out this video]. They have built a service that is easy to use, self-provisioning and needs no human intervention. This is why they were able to on-board 40 million new customers during the last 12 months with a net increase of only 7 people across their entire company! This is where SaaS companies can become very profitable and grow very quickly.

Another area that can really impact COGS is related to the 30-day trials associated with most SaaS software. Without a scalable platform that has a sufficient level of automation, the launching, management, tear down and re-provisioning of resources will all be done by an ever growing team of professional services or IT professionals. Best practice is to leverage a multi-tenant platform and automate everything possible.

Strive for Independence

For ISV’s who are either transitioning to or launching a new SaaS offering, it is important to seriously consider keeping the new SaaS organization separate from the main business. I have seen many ‘shared service’ models where different groups share sales, operations, demand generation, services and even support and they experience a lot of challenges. The SaaS business model in many ways is unique and conflicts with most traditional software business practices.

For example, professional services in most software companies is a revenue-center and they are always looking for ways to generate additional projects and revenue. At a SaaS company, the professional services team is doing the opposite.  A SaaS services team is trying to minimize their level of involvement with the customer, and the less services involved in setting up a SaaS product, the better. This would be a difficult group to manage if you have both a revenue quota and are also trying to minimize revenue associated with SaaS accounts.

The other reason I often recommend creating an independent group for transitioning ISV’s is that the overall rate and pace of SaaS companies is quite different than traditional software firms. SaaS firms develop products more quickly, sales processes are faster, deployments are more rapid and this mismatch in speed creates a lot of stress when traditional ISVs try to adopt this rate and pace.

It is also important to continue the care and feeding of the core business and realize that is also a critical success factor. By allowing this type of co-existence you can move at the right rate and pace, while continuing to build and run your core business.

There are many other tips and tricks to starting your SaaS business.  Feel free to email me at kevin@montclairadvisors.com and I have some other materials that can be helpful for those who are new to the SaaS model.

Company:          Eloqua
Started:             1999
Located:            Vienna, Virginia
Geography:       Global
Market:              Revenue Performance Management
Products:         Marketing Automation platform and Revenue Performance Management applications that help growing businesses align their sales and marketing teams, identify and nurture revenue opportunities and measure marketing and sales effectiveness

Customers:       Adobe, AON, Dow Jones, ADP, Fidelity, Polycom, and National Instruments.
Website:           Eloqua
Blog:                It’s All About Revenue
Twitter:             @Eloqua

Recent News:

Eloqua’s Social Media ProBook Takes Home the Gold

Citrix GoToWebinar Integrates With Eloqua AppCloud

Innovative, Revenue-Focused Marketers Recognized at Eloqua’s Fifth Annual Markie Awards

Eloqua Creates “All-in-One” Marketing Automation Resource Hub with New “Business Center” Portal

Over the past few months SaaS companies have continued to announce very large funding rounds as they are demonstrating the power of their subscription-based business platforms. Many of these firms are deciding to do large private rounds before filing to go public. Here is a quick round-up of some of these firms:

The company has raised an amazing series B round of $250 million. Dropbox is the Cloud storage company that is very popular with mobile phone and iPad users. They have about 70 employees and have secured more than 40 million customers in the past 12 months. This round put the company’s market valuation at close to $4 billion. This is probably the largest B round we have seen and may have been done as an alternative to doing an IPO.  Sounds like a Facebook type of story because like Mark Zuckerberg turned down a significant acquisition offer from Google, and apparently the DropBox founders, Drew Houston and Arash Ferdowsi, turned down a nine-figure offer from Apple in 2009.

Workday or “PeopleSoft 2.0″, has been making consistent progress towards a 2012 IPO and announced at their recent Workday Rising conference in October that they had just closed an $85 million dollar round of funding. Like Dropbox, Workday has now raised about $250 million. With this lastest round, the company is now valued at $2 billion. What was interesting is that unlike most private fundings, which are usually led by venture capital firms, this round was lead almost exclusively by institutional investors like T. Rowe Price, Morgan Stanley, Janus and Fidelity. As co-CEO Aneel Bhusri put it “In some ways, it’s an early debut of an IPO.” Workday claims they are on track to do about $320 bookings during 2011, which is more than 100% CAGR from 2010.

Another major Cloud storage company, Box.net, resisted a $600 million dollar offer from Citrix and just closed an $81 million round with Bessemer Venture Partners, NEA, Salesforce.com and SAP and existing investors Draper Fisher Jurvetson and Andreesen Horowitz. After this round the company’s valuation is $600 million. The company has about 7 million users and is leveraging a very successful ‘freemium’ go-to-market model.

With competitor Eloqua already in IPO registration to raise $100 million for their Revenue Performance Management (RPM) platform business, Marketo isn’t far behind. The company announced last week that they had just raised another $50 million in a round led by Battery Ventures along with Institutional Venture Partners, InterWest, Mayfield Fund and Storm Ventures. Marketo’s estimated size of around $15 million in in 2010, should double in 2011, but they are probably a little small to do an IPO at this point. Obviously the venture community thinks this RPM area around marketing and revenue optimization for SaaS is quite hot right now.

As part of their IPO registration, Jive Software just raised another $40 million prior to their public offering. Sequoia Capital and Kleiner Perkins Caulfield & Byers purchased stock through preferred warrants. Jive is provides an enterprise social business platform. Currently the company is on a $80 million run-rate but still not profitable and has raised close to $100 million overall.

Enterprise subscription commerce and billing provider Zuora also announced a large round of funding last week. The company raised a Series D round of $35 million from Index Ventures, Greylock along with a personal investment from Workday co-CEO Dave Duffield and their existing investors. To date the company has now raised $82 million. Zuora plans to use these funds to aggressively expand their distribution activities internationally, specifically in Europe.

The common thread for all of these companies is that they have businesses that are growing rapidly and have built very scalable platforms. With the IPO window open, but the public markets are still uncertain, we will probably see more of these type of IPO-preview type of funding announcements as SaaS firms continue to gain momentum in the market.

For the SaaS world, Oracle’s OpenWorld has lately been all about hardware and the Exastack products. These offerings have limited appeal to all but the largest SaaS ISV’s.   The good news is that there were some new announcements though that were much more interesting for the SaaS community at last week’s Oracle OpenWorld in San Francisco.  Here is a quick summary of the news and drama:

Oracle Public Cloud

This was a welcome move by Oracle, to finally embrace their vision of the Cloud. Oracle is re-packaging many of their assets including the Exastack, Java, and the Oracle Database into a pay-as-you-go service, which should be appealing to smaller customers as well as ISV’s looking for an easier way to leverage Oracle technology.

The key theme that Larry Ellison [video] kept emphasizing was that the Oracle Public Cloud is standards-based and will allow a customer to port products they built on their Cloud to other standards-based Clouds or even on-premise. Larry was quite funny in his keynote by referring to his competitor’s Clouds as the “Roach Motel of Clouds”, because once you go in, you never come out.

In addition to just pure infrastructure services, Oracle will also make available its applications including Fusion CRM and Fusion HCM products as their collaboration platform.

Here are some other interesting articles on the Oracle Public Cloud:

• Ellison Reveals Oracle’s Public Cloud; Calls Salesforce The ‘Roach Motel’ Of Cloud Services, Rip Empson, TechCrunch.
• How Oracle’s Public Cloud Is Different, Charles Babcock, InformationWeek.
• Oracle Public Cloud might be extensive, but it’s boring, Larry Dignan, ZDNet.

Oracle Social Network

Sounds a little like that movie about Facebook. The Oracle social strategy is to provide an easy-to-use interface for both their new Fusion applications as well as the Oracle Public Cloud.

Their social network looks remarkably similar to the Chatter offering from Salesforce.com. The Oracle Social Network allows you to track projects by activity streams, follow people and objects as well as standard collaboration inside the enterprise.  There is no social analytics capability similar to the Radian6 offering that Salesforce offers, but I think this is just version 1 of the Oracle Social Network.

This new collaboration tool will also be available on-premise as well as in the Cloud. The Oracle Social Network also provides an iPad front-end that should be appealing for mobile workforces

Fusion Application Suite – Now Ready

Last year there was a quiet announcement of the general availability of the Oracle Fusion applications. This year was much different with Larry Ellison announcing the full suite of Oracle Fusion apps and he even did a demo of their new Fusion CRM system (BTW he did a great demo).

Oracle spent six years to completely re-write all of the PeopleSoft, Siebel, Hyperion suites of applications and now there is a new generation of Fusion applications including;

• Fusion CRM
• Fusion Financials
• Fusion Governance, Risk and Compliance
• Fusion Human Capital Management
• Fusion Procurement
• Fusion Project Portfolio Management
• Fusion Supply Chain Management
• [Photos] Fusion Apps

The interfaces look modern and don’t appear to be warmed over client/server applications. Coupled with the Oracle Social Network, these products should be quite competitive in the SaaS market. All of the Fusion applications are available either on-premise, as a managed service and as a SaaS service through the Oracle Public Cloud. There weren’t a lot of details about this hybrid architecture and like the Oracle Public Cloud and Social Network, there will probably be more details early in 2012.

Salesforce – Occupy OpenWorld

As always, there is some great theater at OpenWorld when Oracle rescheduled Marc Benioff’s keynote to Thursday morning (the day the conference ended) and he went rogue. Salesforce quickly shifted the keynote to the hotel down the street. Montclair Advisors was right at the press conference but as it turned out it was basically the same Social Enterprise keynote that was delivered at Dreamforce.

A lot of kudos goes out to the Salesforce marketing team for being able to pull off such a solid event, including streaming the keynote speech over the Internet, in less than 24 hours. Talk about business agility!

Here are some pictures from the event and a few articles with more controversy:

• [Video] Marc Benioff’s rogue Oracle OpenWorld keynote.
• [Pictures] Montclair Advisors was at the rogue Salesforce press event, got some good shots.
• A Keynote Cancelled, A Database Dropped, Lauren Carlson, Software Advice.
• Benioff, Denied OpenWorld Keynote, Mounts Podium Anyway, Charles Babock, InformationWeek.
• Oracle OpenWorld snub fails to put off Salesforce CEO, Brid-Aine Parnell The Register.

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

Depending on who you listen to, things are either recovering slowly, or we are slipping back into a recession. It can be argued that for most software companies, if you are selling a SaaS-based solution then it shouldn’t affect your business very much. In fact, as the economy gets tighter for buyers, SaaS solutions even make more sense for forward thinking businesses who are focusing on innovation and cost controls.

During the Great Recession we saw that traditional software companies experienced a net decline in their revenues and in some cases their revenues went down by nearly 50% year-over-year between 2008-2010. In big part this was because traditional software customers no longer had available the necessary capital dollars to spend on their perpetual license-based products and the banks were no longer lending.

These traditional software companies had also hastened their revenue decline by raising their annual maintenance rates, which put more pricing pressure on their customers at a time when they could least afford it. So their customers started taking a hard look at SaaS solutions as potential alternatives to traditional on-premise software.

Recession Accelerates SaaS Adoption

It wasn’t that SaaS solutions hadn’t been around for many years, it was that for many large software buyers, they hadn’t felt comfortable with software that was being managed by another companies. There were a lot of questions: Where was their data being housed, was it safe, what if they can’t handle our requirements? These were legitimate questions but many SaaS value propositions began to win over these large, skeptical customers:

• You could try their software before you buy it
• Get can get this software up and running quickly
• Only buy the functionality that you need
• If you don’t like their software, for any reason, cancel your subscription
• The software’s performance and availability is guaranteed
• Pay though a subscription, a big lump sum payment is not required
• No more upgrades, this type of software is always current
• Less or even no staff required to manage their software
• Lower total cost of ownership

These types of on-line solutions started resonating not only with the small and medium-sized company buyer but also with the very large, global enterprises as well. Over the last couple of years we have seen well-known organizations like Siemens, Walmart, Flextronics, Thomson Reuters and even the US government adopt SaaS and Cloud-based solutions.

It’s About Innovation Not Reducing Costs

Businesses during the last recession were primarily trying to reduce costs, which resulted in large scale layoffs. These firms were trying to ‘do more with less’.  This was the reason that many of these companies continued to buy software because they not only wanted to streamline operations, but also they needed to continue to innovate their business.

By deploying the latest in software technology, these innovative companies are looking to move into new markets, provide state-of-the-art tools to their employees, and optimize their supply chains.   This required them to get smarter about their businesses, markets and competitors, and solutions like SaaS-based business intelligence products were also really in high demand.  Given the flexibility and affordability of SaaS products compared to their on-premise predecessors, it is no wonder that most SaaS companies grew at more than 30% year-over-year even during the worst part of the recession.

There are SaaS solutions for almost every enterprise need including ERP, Financials, CRM, Marketing, Human Resources, Talent Management and even specific specialized vertical solutions.  Click on this link to access Montclair Advisors Public SaaS Index to see which firms offer leading SaaS solutions.

In the next 12-18 months we may be either headed for very slow growth in the economy or even another recession, but SaaS companies will continue to grow quickly because most companies are still looking for ways to lower their total cost of operations and improve their ability to innovate and increase their overall competitiveness.  As long as SaaS providers continue to deliver on their Cloud-based value propositions, they will experience rapid growth even if the economy continues to be tight throughout 2012.

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:

ServiceSource Releases Service Revenue Performance Suite to Bring End to End Service Revenue Management to the Cloud

ServiceSource Announces Partnership with Good Technology to Enhance Recurring Service Revenue and Customer Loyalty

Service Executive Industry Board Adds Three Industry Experts to Support the Standards Process and Thought Leadership

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.

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.

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.