Larry Steele brings more than 20 years of experience in technology to his role as technical vice president of software-as-a-service at Savvis, Inc. He leads the overall global strategy for SaaS solutions for Savvis.
I continue to hear more and more questions from software companies about how to transition to a SaaS solution from a legacy on-premise business model.
For those software companies considering such a move, there are several factors in each department within the business to think about during this transition. While I don’t have all the answers, I would like to share some basic thoughts to keep in mind for each department.
Here are some things to think about:
You will want to review your sales compensation model. Sales people want to receive commissions on sales up front. Setting up an annuity-based commission may not entice your sales team to sell your software in a subscription-based billing model.
It’s not just about compensation: you could technically have a comp-neutral model for perpetual licensing and SaaS bookings. However, you need to examine how Sales is compensated on revenue or bookings.
In most instances, at the field level or even first-line management, compensation should be based on bookings. This means that a comp-neutral plan could solve all your problems. However, senior sales management may be compensated on revenue, which means they will try to steer SaaS deals, particularly those at end of a quarter when there’s a revenue crunch, toward a license transaction. Additionally, you’ll need to take into consideration your indirect channels; they also like the immediacy of their margins coming off of a license resell.
Lastly, if you set up term limits (i.e., 12 to 36 months) in your subscription billing, then you will want to review your renewal process and make sure your sales team has the right incentives in place to keep the customers you have. Remember, it’s harder to find new customers than it is to keep the precious ones you have.
In the past, with on-premise software, software companies competed on features and functions as well as underlying architecture. In a SaaS delivery model, the underlying architecture matters significantly less to customers because they never actually touch the infrastructure.
Customers should not care about the Web servers running your software, nor whether it’s delivered via J2EE or .NET technology, or which database server you use to store your data. But your customers will care about features and functions and ease of use (i.e., the service you provide them through the vehicle of a software application).
There are new subtle benefits that matter in a SaaS model, including but not limited to Service-Level Agreements (SLAs), overall reliability, how you secure your data and various certifications.
I could go on and on here, but one other important area to market is your customer service and how you respond to your customers. In a SaaS world, switching costs still exist, but the barriers are not as high as they once were since the capital investment has been removed.
A business model in which revenue each quarter was determined by sales of perpetual software licenses and maintenance revenue was not always smooth quarter over quarter. With a monthly subscription services approach, your back-end financial systems will need to change. You will need to track new metrics for your application (i.e., number of user log-ins per company per month).
Can you bill for active and inactive uses? Should you just bill based upon registered users? Do you have user and/or usage tiers? Do you or should you have billing based on user entitlements? Each of these are important questions you need to answer in your transition. As you answer these questions you should begin to recognize much smoother monthly revenue recognition.
Investors like – and reward – a much more deliberate revenue stream. However, this is NOT a simple transition. There are other areas, like churn, you need to worry about in your financial model. If you don’t keep your customers happy with your application or service, they will leave.
Billing/invoicing is a much bigger deal as well. You once sent your customer an invoice for the perpetual license and then the following year you sent them an invoice for the maintenance. If you convert from an annual bill to a monthly fee-based subscription you will need to send them monthly invoices. Unless you’re an ISV (Independent Software Vendor) that builds billing software, we suggest finding the right billing provider to partner with rather than trying to build your own billing engine. How you bill or invoice your customers can be extremely complex and will be based on your business model, application, usage model and your customers.
In the past, it was your customer, you the software company or an integrator who had to respond when there were issues in the application or infrastructure. More than likely it was the customer or integrator. Software companies have typically been level two or three support. Traditional software deployments created elements of operational complexity due to how your customers had implemented your software.
In a SaaS model, your software is operated in a cloud. Regardless of whether it is hosted with a third party or internally deployed, operational support will shift completely away from your customer. How you respond to inquiries and issues requires well-defined process and procedures; especially if you want to support 24x365 reliability. I could go on and on.
In all, I'd recommend that software companies should not try to figure out a business model transformation on their own, but look for experts (such as a professional services team) to help them in this transition.
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