Smart SaaS

I was just at the SIIA On Demand 2008 conference in San Jose this week.  There was a great panel discussion which covered one of my favorite SaaS questions; ‘How do I move over to a true SaaS business model?’

Just change the pricing model and host the product, right?  Well not quite…

Some key things to consider when moving to a SaaS model:

* Changing the DNA of your company can be difficult  but critically important to succeeding in this type of transformation.  It is helpful to inject some fresh team members into the mix who have solid SaaS experience.  Also be aware that an ‘A’ player in your old software business model might only be a ‘B’ or ‘C’ player in your new SaaS business. This is really important when it comes to transitioning your sales and development teams!

* Executive commitment.  Make sure that your CEO and executive team are bought into making the move to SaaS.  The initial financial fall off can be very scary for your company and its investors and a committed executive team is essential to crossing over the chasm.

* Different financial model for the company.  There are new ways to think about revenue recognition, annuity streams, deferred revenues, bookings, GAAP rules, VSOE and pricing that need to be managed and rationalized against your current perpetual license business.

* Move Quickly.  Once you decide to move, the sooner you make the changes the better.  You won’t look back and regret the decisions you made, but only the ones you delayed. Don’t try and live in both models, it just won’t work.

Several approaches to building your migration strategy include: 

* Cold Turkey.  When the CEO, executive team and board just decide that staying on the old model will no longer work and they make the decision to move.  This is the most direct approach and takes a nerves of steel to resist the on-going temptations of slipping back into the perpetual revenue trap in order to save your quarter.  The best case study I know of is of Steve Singh the CEO at Concur.  After the Internet bubble burst, he transitioned his firm over to a pure SaaS model and is today one of the leading publicly traded SaaS firms. Other brave firms who are using this approach are Ariba and Sabrix.

* Buy your way into SaaS.  Acquisitions can be a fast way to get the product and people needed to begin moving your model towards SaaS.  It is important that when you take this approach, that you firewall your existing and SaaS businesses and don’t try and to blend them.  Over time as your SaaS business grows to scale, you can turn off or spin out your traditional business. Examples of firms who are using this approach are SAP’s purchase of Business Objects, and  SumTotal’s acquisition of Mindsolve .

* Create a SaaS Division.  When buying an existing business doesn’t make sense, you can build a separate SaaS business unit that lives by SaaS business rules and functions alongside your perpetual software company.  This ‘separate but equal’ strategy can work but executive management needs to support the independence of the division and be committed to building out a real SaaS team, because this is the beginning of your new SaaS company.

The model that really DOESN’T work, unless you are a multi-billon dollar firm, is to pursue a Hybrid Model that mixes both perpetual license with SaaS businesses.  There are plenty of examples of software companies that have tried to leverage both models with limited or no success.

Ironically for some software firms, this economic downturn may provide the ideal time to  move to a SaaS business model.  Remember to work with your executive team to build a 12 -24 month plan, then find some new SaaS talent to inject into your business, then find the model that works best for your company.

For more pointers and ideas give me a call or drop me an email.