Taking SaaS Both Ways (aka SaaS Strategy for Old World ISV’s, Part 1)
Posted by Bob Warfield on September 4, 2007
There’s a pretty good blog fight between Phil Wainewright and Anshu Sharma going on at the moment. The gist of it seems to be the age old conflict between whether SaaS is something one can gradually morph over to (ala Anshu’s views) or whether it is more of an all-or-nothing proposition (Phil is being the stickler for this). There’s a lot of heat in the discussion, but the calmer factual discussion has yet to emerge. It’s not surprising, because SaaS can be a very threatening topic for most Old World ISV’s (dare we call them Legacy ISV’s?). The reason it is threatening is that SaaS is a disruptive technology. It forces you to make a choice and not just glide gracefully along the centerline.
I’m not talking about the usual arguments about multitenancy here. As Phil readily admits, multitenancy is a convenience for the SaaS vendor. Yes, it can enable cost savings for customers, but even that is not always the case. In fact, it is largely only the case for Small and Medium sized customers. It is true that the average customer size for a company like Salesforce.com is small, perhaps 20 seats per customer last time I looked. But consider larger Enterprise sales. I’ve worked at companies where life didn’t really begin until a sale of say 300 seats, and even that was considered an extremely small deal. For companies like that, Multtenancy offers far fewer benefits, and much simpler virtualization technologies may make it possible to cost effectively deliver the app in a manner compatible with the full faith and credit of the SaaS Ideal. There are other technology factors, but they’re much easier to overcome than the factors I worry about.
What I’m talking about are people and business factors, which are much harder to change than technology factors (as I used to say about technology, “This is software, we can do anything, it just might take awhile.”). Specifically these are factors relating to revenue recognition and sales cycles.
SaaS revenue is recognized ratably over the term of the contract. In other words, companies get revenue month by month. Perpetual licenses are typically recognized entirely in the same quarter they are sold in. Sell a $1.2M license: see $1.2M that quarter. Sell a $1.2M SaaS contract: see $300K that quarter. Whoa! If I sell SaaS I might get 1/4 as much? What will my investors say about that? There are several mitigating factors, but getting over this initial shock is extremely hard for Old World ISV’s, particularly if they are public companies. For this reason, Oracle’s SaaS business required you to buy the license up front and was simply a hosting operation from that point. It’s no wonder the business never amounted to that much on their radar.
Selling Cycles are also a key. Those of you who have worked for an Old World ISV will know that the quarter gets made right at the very end. Old World ISV’s that know they should transition to SaaS typically want to take the easy way out. They want to wait until the quarter is made, and then push the remaining business to SaaS. Unfortunately, it just doesn’t work that way. The customer has to decide much earlier in the Sales Cycle whether they want SaaS or On-Premises software. The way the deal is presented and sold, the benefits, and the way the deal is negotiated all change radically depending on which fork you take. It literally becomes impossible to wait for the quarter to be made and then push everyone to SaaS.
The upshot of all this goes to heart of why SaaS is Disruptive: it forces the ISV to make a choice early, and in making that choice, they bear the burden of risk. Given the growth rates of many Old World ISV’s these days (the wonderful English word “treacle” comes to mind), its an extremely tough choice. Meanwhile, if you have a SaaS vendor that was built for it from the ground up, they don’t face that ugly choice. They are not confusing their prospects with a mixed message. They are focused single-mindedly on an offering that has compelling advantages. Is it any wonder they can acquire revenue more cheaply than Old World ISV’s do? Doesn’t this just make SaaS even more disruptive and threatening? You bet it does.
So what should the Old World ISV do?
There have been companies like Concur who’ve done a wholesale switch to SaaS. A look at Concur’s numbers shows this to have been an astoundingly good decision, and perhaps one that saved the company. Most companies will not want to pursue the pain associated with this. I have a different proposal for those unwilling to go cold turkey to SaaS: you have to create protected game preserves in which to pursue growing a SaaS business. These are markets defined by a variety of factors (product, geography, vertical industry, etc.) where you choose to limit yourself to a pure SaaS offering.
I’ll talk in greater detail about how to go about creating protected game preserves in a later installment.