Company:                   Ariba

Started:                       1996

Located:                      Sunnyvale, California

Geography:                Global

Market:                        Collaborative business commerce solutions

Products:                    Ariba Commerce Cloud Buy, Sell and Manage Cash

Key Customers:         Avaya, Clariant, Deloitte, Del Monte Foods, Ohio State Medical Center, OfficeMax, Saks and Staples

Website:                      Ariba

Blog:                            Ariba Exchange Blog

Twitter:                       @Ariba, @AribaExchange and @AribaContract

Recent News:

B&H Boosts Business through Ariba

Growing Enterprises Boost Profits and Performance with Ariba

Gasunie Fuels Better Commerce with Ariba

I asked Dan Ashton at Ariba a few questions about his company’s transition to a SaaS business model over the past few years, ideas around best practices and lessons they have learned.

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

We started our transition to SaaS about 6 or 7 years ago. Our entire management team looked into the future and realized that this was the way the market was moving and they wanted to get in front of this growing trend.

When we looked at our installed base, we had mostly large, Fortune 100-type on-premise customers, who had all highly customized our solutions. We felt that heading down this path exclusively we were limiting our market to only the very largest companies and we saw the potential to embrace SaaS and how it could open up our opportunities to serve a broader section of the overall market.

What lessons have you learned in building your SaaS business?

In order to move to SaaS you need to really change your culture in order to successfully embrace the subscription business model. We had to understand and communicate inside of our organization, and focus our energies and talent on building out this new model. We didn’t want to just re-create our CD-based business in the Cloud, and it was important to convince everyone that this was the right thing to do for our company.

It required that we look at our entire business in a new way. For example, deploying our software through a self-service approach instead of always having to use a professional services team to implement out software. We also had to realize that our first SaaS product was not going to be perfect or functionally complete as compared to our existing on-premise product, but this was just a step in our transition to a subscription business model and that it was good enough to start with. Today our subscription products offer more and better functionality that their on-premise counterparts.

From a technology perspective we also had to rewrite our products on top of a new multi-tenant architecture because the old CD-based architecture was optimized for the scalability and flexibility requirements of our new SaaS business. So we made this investment in rewriting the products but we also invested in bringing new SaaS-experienced talent with specific skills into the organization to help in other areas of the business as well.

We didn’t want to alienate our existing customers, and realized that we couldn’t force them to move and told them they could do it in their own time. This meant that we had to continue to support our existing CD-based products.

For those customers that have highly customized solutions, it is not easy to migrate to SaaS and right now they don’t want to change. Our approach has been to provide additional Cloud-based value-added components like Procurement Catalog content or RFP Management Sourcing, to allow these customers to leverage their existing investments while being able to take advantage of our new SaaS-based solutions.

Product adoption and utilization are also very important. When a customer successfully adopts our products they are usually satisfied and will renew the service. When they don’t use the product fully, they can’t unlock the full value of our solutions, and then we might be at risk.

Ariba tracks all sorts of processes inside of our SaaS business including renewals and customer satisfaction. We send out surveys just after an implementation goes live, as well as throughout the subscription term because we don’t want any surprises. When issues come up, they are escalated all the way up to senior management, if necessary, because we really want happy customers. That is why our customer renewal rates are above 97%.

As part of the transition we created a customer success team that was focused on customer satisfaction, making sure they were utilizing our products to their maximum benefit, helping with product adoption and sharing best practices.

We also monitor when customers don’t put enough spend through our solutions, because when they buy our products they are anticipating a certain level of savings. Ariba is motivated to get our customers to put their spend through our system, because we sell our products based on value-based pricing model. So we are motivated for our customers not only to get value from our systems but we also get additional revenue, so it is a win-win. By putting more spend through our system customers can typically save between 5-15%, which for most customers can be a lot of money.

Another lesson learned was that we had to change to our financial model, especially the necessary shift from license to subscription revenues. This new cash flow model affected everything, and made us more conscious of how we were spending our money.

We also had to work hard to re-calibrate our story and with investors and the industry analysts. This was because our commitment to our SaaS strategy meant that if they didn’t really understand our plans, and the implications of our business changes, there was going to be a price to pay. This is why we carefully explained our roadmap to the financial community and that there were going to be decreased revenues and earnings over the near term but longer term we were really making an investment that would deliver increased stability and security for our company in the future.

During the SaaS transition our management team really had to make changes at all levels of the company. They had to communicate the message and sell the model both internally and externally. It is a hard transition and unfortunately not everyone can make the transition, we just found that some people just can’t do it. Our management stayed focused on customer satisfaction because they knew that a key part of the SaaS model was keeping our customers happy.

Why was moving to SaaS important?

One reason is that it really expanded our addressable market by being able to offer a more affordable, flexible SaaS product. Customers could start with our Sourcing or Contract solutions by doing a free trail and then license the products for as little at $100/month per seat versus having to pay millions of dollars using the old model. This just opened up the broader market for us.

Moving to SaaS has also forever changed our culture at Ariba. We have become a more vibrant and energetic organization that is focused on customer satisfaction. Our employees are excited about working for our company because we are a product innovator and a leader in our market.

At the beginning we felt like we were playing catch up all the time but once we reached product parity, we started to operate a different release cadence, which was really important to our overall business agility. This allowed us to break out different solutions and we no longer had to manage one large monolithic solution that just seemed to slow us down. Now we release a product every quarter.

Market analysts now look to Ariba when they are thinking about where the market is headed around Spend Management. We have even created a new market space and called it the Ariba Commerce Cloud, where we not only connect buyers and sellers but also help our customers manage their cash. The Commerce Cloud is also about how we can help customers collaborate with their sellers, using a very innovative approach. At Ariba Live, our annual user meeting, in the past would only attract a few suppliers to this event but now nearly 40% of the attendees are suppliers and they are very bought into our
SaaS products and our vision for the future.

by Kevin Dobbs

Montclair Advisors, LLC

Now with all types of Software-as-a-Service alternatives in the market today, one tip that separates the winners from everyone else is the ability to create a product that is truly viral.  Granted several of these companies listed above offer consumer-oriented offerings, not traditional enterprise or corporate software there are examples like Yammer, were large organizations have very quickly adopted their products because the internal usage spreads like wildfire.  I profiled Yammer and they are definitely an organization that has built its sales and marketing model on being viral.

Here are some tips when thinking about incorporating viral adoption into your product and business strategy:

• Offer a free version of your software. For most SMB SaaS firms this is now table stakes to play in the game, but for firms like 37Signals, Freshbooks and Yammer have leveraged their free versions as a way to generate qualified paying customers.  Keep in mind this is not pursing a Freemium strategy (ask like a SmartRecruiters, Dropbox or Mint.com), it is just a way of generating a lot of new users, which then can be converted into paying customers.

• Clear pricing for your product.  By offering a high degree of transparency around pricing, software companies can take the pricing conversation off the table and allow their customers to make their own decisions before they ever contact you.  Here is an example of how 37Signals’ Basecamp product pricing looks on their website… it’s really easy.  This type of tiered pricing allows the customer to self-select the amount of software and service they need to get their job done, and it also enables the customer to start small and add more capability over time.

• Trials.  If you have a tiered pricing structure but don’t offer a free version of your software, then it is highly recommended to to have a free trial version (up to 30 days free).  This allows your prospects to experience your product first hand and explore its features and functionality.  If the product is relatively straightforward then you can let the prospects just play in their own sandbox.  On the other hand if you product is complex or requires some context-setting, then it would be a good idea to offer proctored assistance through assistance over the phone, webinars or even short videos to help them with individual features.  Intuit has really embraced the SaaS business model and offer many trails including this one for their Intuit Websites product.

• Intuitive interface. Really think through your interface and make it as easy to use as possible.  Most software users would prefer to do things themselves and your products interface is the key allowing them to do that.  Companies like Intuit do a lot of testing around how their products behave in real-life situations and they observe their customers actually using their products.  This helps with screen layout, workflows and even user roles for certain types of applications.

• Keep training to a minimum.  If you offer an intuitive product, then there is less of requirement for training but most applications require some type of overview or setup.  For anyone who uses an iPhone, iPad or MacBook Pro, Apple provides all types of training videos that are quite informative and help to get you started using their products.  Also providing a solid knowledgebase of information as well as a vibrant user community also helps to get customers up and running successfully with your product. Check out what Constant Contact’s Learning Center.

• Small consumable chunks.  We can learn a lot from many of the learning consumer Internet firms like Facebook, LinkedIn and even Zynga.  Especially gaming firms like Zynga (Farmville) have taught us to start small and then expose more functionality over time.  This allows for easier consumption of capabilities and viral adoption of solutions.

• Rapid Time to Value.  Even more complex systems need to be able to be ’stood up’ quickly.  We often recommend creating a generic version of the software that can be provisioned very rapidly and made available to the customer.  For an SMB type of product I would recommend <1 days to get a basic version and for complex enterprise applications, you should try to deploy a generic version <5 days.  Even though this version of the software will have its functionality and UI configured, data added, workflows tailored, it is important to give the customer something they can start using as close to immediately as possible.  This is also a good idea from a revenue perspective as well because you can start to charge once your customers start using your systems.

Company:            Yammer

Started:                2007

Located:               San Francisco, California

Geography:          North America

Market:                Enterprise Microblogging Platform

Products:            Yammer Desktop, Yammer on your Mobile Device, and Yammer Plug-Ins

Key Customers:  Deloitte, AMD, AAA of Northern California, Nevada and Utah, SMG, Cargill, Thomson Reuters, Sungard, Hill & Knowlton and SunCorp.

Website:               Yammer

Blog:                    Yammer Blog

Twitter:                @Yammer

Recent News:

Yammer is Selected as an MIT Sloan CIO Symposium Innovation Showcase Finalist

Fortune 500 Companies Flock to Yammer

Yammer Secures $10 Million in Series B Funding from Emergence Capital and Previous Investors

I asked David Sacks, Yammer’s Founder, CEO and Chairman of the Board few questions about his business and his view of the SaaS market in 2010.

Did you start out as a Software-as-a-Service company?

Yes, we did start out as a SaaS company. Our company was incubated inside of Geni, which develops family tree software. I was also involved with the consumer Internet with my experience starting PayPal. As both companies scaled, I found it was hard to keep tabs on what everyone was doing, and Yammer was developed to address this challenge. We found that microblogging was a great way to keep current on the status of important projects, individual profiles and information feeds inside of an enterprise.

Then in 2008, we spun out Yammer and that same year won the TechCrunch 50’s Best in Show award.

Initially we were targeting small and medium sized businesses but we are now seeing that Yammer has strong appeal for large enterprises like AAA, AMD, Cargill, Cisco, Deloitte, and Thomson Reuters.

Yammer is very viral because it was very easy for anyone to sign-up, confirm their company’s email address and start using the system. You don’t need to wait for an IT administrator to set up Yammer and you can quickly invite your work colleagues, with the same company email domain, to join in and begin collaborating with you.

When a company wants to claim the network being used by it’s employees, they pay a nominal subscription fee, and then we provide a set of administrative tools that allow them to manage upgrades, security, compliance, deliver premium support, and customize their site.

Part of our initial business model was to base Yammer on the consumer model of software, but make it enterprise-class. We wanted to remove the traditional friction from our software sales process by making our product as easy to use as Facebook.

Why do your customers buy from Yammer?

Our customers never have to pay or upgrade our software unless their employees are using it. This is very attractive, when you compare it to the traditional software selection process where you have to vet vendors, choose one, negotiate the contract, implement the product, pay a lot of money and then no one uses it. Yammer is de-risking the traditional enterprise software value proposition. Employees are valuing it because they use it.

When large companies see thousands of employees using Yammer what do they do? They can do three things - wait and see what happens, shut it down or buy it and we are finding the vast majority of companies are buying Yammer because their employees are being productive and want to collaborate using the software.Our customers also really like our administrative tools for e-discovery, security, directory integration, and network administration.

“If Facebook and Twitter had a baby, it would be Yammer.”

We are like Twitter because we offer a real-time feed of information; you can follow any one, join groups and sort information feeds by hash tags. We are like Facebook because there is no 140-character limit, you can have attachments, threaded replies and we offer a variety of enterprise management tools.

Yammer is a like a virtual office where workers can feel more connected to each other, especially remote workers. We act like the traditional company water cooler for these distributed organizations. As workforces become more mobile, Yammer just make a lot of sense for enterprise collaboration. Today we only offer Yammer in English but we have noticed that there are an increasing number of new customers who are signing up outside of North America. In the near future we will be supporting multiple languages in addition to English.

Customers also like our value-based pricing model. We charge between $3 and $5 per seat per month, depending on the level of support and administrative tools. We also provide volume discounts for our larger customers. This is much more cost attractive than purchasing Chatter from Salesforce.com for $15 per seat, which is quite expensive and most employees don’t want to communicate through the company’s corporate CRM system. Our very fast viral Freemium approach appears to be working, because since we have been live for only the last 18 months we now have over 1 million seats today.

What do you see as the key trend emerging in the SaaS industry?

The first trend is the consumerization of enterprise software; Yammer is a great example of this trend. Real innovation in the technology space over the past 10 years has been on the consumer-side of the software market with products like Facebook and Twitter. At Yammer we want to take these learnings back into the enterprise software world. When I was at PayPal, we were very successful using the Freemium model to promote adoption. This type of approach to software can definitely result in the overall democratization of enterprise software. SaaS is the first step, when the delivery model changed, then there were no upfront costs and the risk is dramatically lower. Using techniques developed by consumer software firms, more and different kinds of buyers can now access enterprise-class software.

The second trend we see is that enterprise software products will be designed more for the end-user than power users or administrators. A good example is how Facebook and Twitter don’t do every possible feature or function and they don’t clutter the user’s screen. This simplified approach to software allow causal users to be more engaged with their products and other users. These types of causal use software products will also appeal to younger employees who have used Facebook and LinkedIn and expect their enterprise software products to be that easy to use.

Social Networking is also a major trend we are seeing. We started thinking about this over the last couple of years, since 2007. Now it seems so obvious, that social networking would grow into an unstoppable trend. The ability to connect workers, to leverage expertise and content all in real-time, which allows everyone to work smarter, just makes a lot of sense. I still think that there is confusion about Enterprise Social Networking, for instance Salesforce sees it as a CRM newsfeed, and we see it as enterprise real-time communication. Eventually we see Enterprise Social Networking replacing corporate email and instant messaging.

What is your outlook for 2010?

In January we raised $10M, led by Emergence, that  provided capital to allow us to expand our team. Our investors liked the fact that we have built a very cost effective business, based on our viral distribution model. Our Q1 sales were greater than all of our sales for last year combined.

The software industry is realizing that Enterprise Collaboration is going to be a huge space. Most software companies will want to get into this market because every company will want one of these collaboration platforms to deploy. The only problem is that most enterprise software firms looks at these types of tools backwards, because they already have multiple different product lines, then they will need to stuff it through their sales channel. At Yammer we have already solved this distribution channel problem and we can actually open up our channel to these companies as a Distribution as a Service model.

We continue to sign up a number of large customers, and this type of adoption makes other large companies comfortable using our technology. Things look great and our traction is accelerating.

Since everyone is interested in SaaS funding and valuations I thought it would be helpful to tell you about an interesting Cloud Computing investor panel I attended at the recent All About the Cloud conference in SF. The session was moderated by Jason Green from Emergence Capital Partners and was joined by Gary Hromadko from Crosslink Capital, Mark McNay from William Blair and Evangelos Simoudis from Trident Capital.

So what did they have to say?

The market has finally changed for the better

2009 was all about survival and the venture community did less than half the investments than in a typical year.

This year is now about growing again and current investments are more focused on companies that have weathered the economic downturn. Their investments are focused on changing the slope of these types of company’s growth curves, by concentrating more on sales and marketing.

SaaS and Cloud companies are leading the way

Consumers have been driving the adoption of easier to use Cloud-based solutions like eBay, iTunes, Facebook, Twitter and LinkedIn. They are viral and can reach critical mass very quickly because there are low barriers to adoption.

With SaaS, the recession has really pushed the advantages of a subscription business model and moving from CapEx to OpEx software investments. It’s like leasing your car rather than buying it.

Lean start-ups are definitely in. Almost all early stage software investments in 2009-10 are Cloud-based because it takes a fair amount of capital to fund SaaS firms and it takes a long time for them to reach profitability. One interesting comment was that later stage on-premise companies are now being asked about what their SaaS/Cloud strategy is for the future, because without it, they may find funding might be difficult.

What the VC’s are looking for

SaaS 1.0 focused on a company’s income statement, expenses and cash flows than GAAP reported financials. One important measurement is a company’s incremental contribution margins (gross margins), which is critical for SaaS. Companies needed to balance capital efficiency with building a business that can scale.

Investors are looking for unique business processes that can only be built or automated through SaaS or the Cloud. Emergence latest investments are pure Cloud-based companies that have viral qualities like YouSendit, the files sharing company and Yammer and the enterprise micro-blogging firm, both of these companies are viral enterprise solutions. Yammer has more than 70,000 customers with at least 1 user and is signing up between 7-10,000 users a month and 10% are turning into paying customers. Crosslink invested in Carbonite, a backup and recovery company, has high margins and is the only other independent player in the category with Mozy, who is owned by EMC. They felt that scarcity of competitors and their ability to manage Customer Acquisition Costs were important in establishing the company’s value.

The panelists also said they are looking for companies that have a rigorous focus on metrics like Customer Lifetime Value and Customer Acquisition Costs. In fact CAC appears to drive business value because it has a lot to do with capital efficiency and the company’s ability to grow their business.

Exits, IPO’s and Valuations

Economy has recovered and CEO’s are ready to start taking on more risk, and it’s a real change in psychology because we are at the beginning of a macro trend that will last more than 10 years.

This is evident by more than 100 M&A transactions last quarter including high profile deals like IBM buying CastIron, Salesforce buying Jigsaw for $142M, Successfactors buying CubeTree for $50M. The current environment is right for deals, especially as SaaS is gaining enterprise momentum with recent deals like SuccessFactors’ mega deal with Walmart for 1.6M users. Transactions like Jigsaw, CubeTree, and CA’s purchase of 3Tera and Nimsoft for $350M all indicate a return to a healthy M&A atmosphere, that will probably last for the next 12-18 months.

Oracle and SAP won’t be aggressive on the M&A front until they come to the realization that they can’t build Cloud solutions internally. Because many SaaS companies have now crossed the $25-30M in recurring revenues threshold, these firms may become quite attractive to these larger ISV’s looking to make the move to the SaaS business model.

But these acquirers don’t want to take on the burn associated with many start-ups so it will be important to stay close to breakeven and you may have to sacrifice growth for profitability. Since the access to capital is still tight, start-ups will have to try and collect cash upfront and continue to tune their business models to improve cash flows.

Companies that seem to own a category have perceived scarcity value which will result in a premium on any transaction, especially if they are perceived to own a segment franchise. VC’s and acquirers are looking for a minimum of 40% CAGR to get a premium valuation.

On the other side of the liquidity front, the IPO window for SaaS companies is beginning to open up and firms like SolarWinds and LogMeIn have now been joined by SPS Commerce and Convio. At least before the recent stock market downturn, these companies had traded up by 15% since their IPOs.

The panel seemed to believe that the market is definitely getting better and that is good news for SaaS and Cloud Computing companies looking for funding or an exit!