Don’t Underestimate the “Service” in “Software as a Service”

As a provider of on-demand budgeting and planning solutions, we are both a consumer of Software as a Service solutions as well as provider. That reality drives home the importance of the service aspect of SaaS.

We rely on a diverse range of SaaS-based solutions, including our own, to drive our business. Whether it’s web collaboration, sales and marketing automation, or budgeting and planning, we rely on our SaaS vendors to be both service providers and solution experts. For example, I am directly involved in the use of web marketing-related SaaS solutions. I also have a confession, I am not a marketing person by either training or experience; I’m an accountant. I welcome all the help and expertise I can get as it relates to web site design, delivery techniques and measurement. The companies that provide our marketing-related SaaS solutions are my trusted advisors. They are teaching me web marketing, helping me look like I know what I’m doing and increasing web traffic.

In addition (don’t cringe when I say this), my software implementations are never complete. In the case of our SaaS marketing tools, we bought the service with one objective in mind but in reality, we have since implemented it to solve six additional objectives. We didn’t plan to use the solution nor did we think we could use it for an additional five objectives when we signed up for the service. Our SaaS marketing solution provider helped us every step of the way to extract more value from their solution. We see the same thing with our customers. They start using our product for streamlining the monthly financial close process, or automating their budgeting process and over time have implemented it for continuous planning, XBRL reporting, IFRS reporting and strategic management. And our support group is providing the additional expertise to support our customers’ further implementations.

We believe that providers of SaaS-based business solutions must put service into the solution as much as the technology and theory. If we are to ever ascend to the leadership of specific solution categories, we need to become “trusted advisors” and sherpas.

To borrow an old adage, SaaS vendors need to teach clients to fish, so they can feed themselves. SaaS expert Jeff Kaplan has some thoughtful comments on the subject. (Do a text search for ‘SaaS Primer’ and follow the link to a white paper, “CIO’s Guide to Software as a Service.” No registration is required.)

Enterprise Licensing for SaaS: Breaking the Glass Ceiling or Mortgaging the Future?

I listened to salesforce.com’s earnings call the other day and was intrigued by the announcement of enterprise-style “licenses” for some of their largest accounts. Though the exact details of the licenses were not disclosed, an enterprise-style license for a large organization is typically an “all you can eat for one price” type of sale. This style of license has been a mainstay of on-premise enterprise application selling for decades (has it been that long?).

As CMO of a SaaS-based solution provider, the question of license versus subscription-based selling is of particular interest to me. To the mutual benefit of customer and vendor, SaaS-based solutions have been subscription oriented with customers purchasing on a “pay as you go” basis. Annual and multi-year contracts are common, as customers want to lock-in pricing for a period of time. The idea of selling an “all you can eat for one price” license to an application customer definitely has its good and bad points.

First the good side of the licensing over subscription model. Simply stated, enterprise-style licensing helps customers with huge amounts of end users cap and control the subscription expense incurred with a SaaS-based service. The breakeven point for moving from a subscription to a license obviously varies by offering, so I’ll let that question be addressed by other bloggers, vendors and industry luminaries. Enterprise licensing makes the expense predictable regardless of the number of users for the customer and helps to justify moving very large organizations to a SaaS-based application. As an example, salesforce.com recently announced an enterprise-style sale at Symantec with 25,000 users. The license pricing model helps SaaS vendors break a glass ceiling that we all knew was there because we knew that it would be problematic to cost-justify the SaaS subscription model to very large enterprises with tens of thousands of potential subscription users.

Then there’s the bad side. Pay as you go subscription pricing is typically treated as an operating expense, a good thing in a bad economy. Operating expenses are preferred in challenged economies because they typically do not require executive level approvals, long term commitments, large upfront cash outlays and special accounting treatment. License-based services are typically treated as capital expenses requiring executive approval, long term commitments and large upfront cash outlays. However, the biggest concern about license selling is the impact on the SaaS vendor because license sales usually imply huge discounts and there’s no ongoing revenue stream if all the revenue is recognized immediately. Getting all the cash upfront may seem like a good thing on the surface, but it is problematic for a SaaS-based service because it’s back to the good old enterprise selling days (were they ever?) of having to find more big license deals every quarter to demonstrate continued sales and revenue momentum. I like a comment that Peter Goldmacher of Cowen and Company made to me regarding enterprise licensing, “Forward selling always seems like a good idea at the time, just like that sixth drink.” The challenge of enterprise-style licensing is that the SaaS vendor has capped their revenue stream from the customer. If the cost of delivering the SaaS service goes up or the customer adds more users, the revenue stream is fixed. From the customer’s perspective, if they have to reduce the number of users, they now have “paid seats on the shelf” in effect raising their average cost per active seat. The implicit “pay for what you need when you need it“ advantage of a subscription-based service is lost.

Enterprise licensing for a SaaS-based service is an interesting and potentially challenging new concept. On one side, I like the idea of making SaaS more attractive to the whale-sized enterprises with tens of thousands of potential SaaS users. But on the other side, it starts to change the very fabric of selling SaaS and the very reasons for buying SaaS. It also leaves a number of unanswered accounting and business questions. From the accounting perspective of the SaaS vendor, what is the duration for revenue recognition, and for the buyer, what is the duration for amortizing the expense? It sounds more like a mortgage than a revenue stream. From a business perspective, what is the incentive for the SaaS vendor to proactively manage the account if there is no additional revenue opportunity for years to come as the customer is essentially locked in financially with a license?

For those of us who spent some time in our career selling or marketing for on-premise enterprise application vendors, it’s déjà vu all over again.

Microsoft Performance Point and SAP SRC Users Learn Why SaaS Shines When the Sunset Comes

What do you do when your software vendor notifies you that their software application, the one you have been using for years, will be “Sunsetted.” Sunsetting is a term used in the software industry to describe a software application that will no longer be sold to new customers and is in the process of being retired by the vendor. The communication from vendor to customer includes terms like “top priority” and “our valued customers,” but the announcement usually implies a reduction in support resources, the end to product updates, a corresponding halt to innovation, and sometimes higher maintenance fees. The clock starts ticking on both the continued use of the application and your internal processes.

The alternative offered by the vendor is typically a more expensive and complex solution whose only similarity to the application you are currently using is the vendor or product name. As an example, Microsoft Performance Point and SAP SRC users have been sent “sunset” notices for their performance management and budgeting solutions. To users of sunset software applications, welcome to the new economy, where the benefits and value proposition of Software-as-a-Service (SaaS) has found a new audience.

SaaS or on-demand solutions offer an excellent alternative to businesses facing the software sunset for one or more legacy, on-premise applications. Because on-demand applications offer a single version of their solution to customers, there is a constant flow of innovation delivered with a philosophy of “upgrade every customer to every new release at no incremental cost,” so that all the benefits of innovation are available.

Businesses that have been notified that their software applications are being sunsetted will be surprised to find a number of advantages in on-demand solutions, such as fast-time-to-value. Today there is a rich assortment of on-demand solutions available, including those offered by leading providers like salesforce.com, SuccessFactors, NetSuite, Workday and Host Analytics. These vendors provide customers with key business solutions that are cost-effective, easy to implement, functionally rich, current and highly reliable. In some cases, the cost of using an on-demand solution will be less expensive than the 22% yearly maintenance fee charged for some on-premise and legacy software applications.

Another benefit is in the on-demand “per user per month” model that eliminates the need to purchase huge user licenses and maintenance contracts (whether you need them now or not). In an economic climate that is seeing a reduction in the need for application user seats, the SaaS per-user-per-month subscription model is a welcomed alternative to the classic, “maximize the number of users licensed” pricing practices of the on-premise and legacy software world.

Clearly, it is never a good day when you get the dreaded software sunset notice from your vendor. Fortunately, SaaS-based on-demand solutions are available to help companies make a timely and cost-effective transition away from on-premise and legacy applications. There’s a new star shining in the sunset of legacy software, and its name is ‘SaaS.’

Hail to the Chief Performance Officer!

Wow, what a week! On January 7, President-elect Barack Obama appointed Nancy Killefer as the country’s first chief performance officer. It actually caught me by surprise. Typically we think innovation stems from the private sector and over time is accepted by the public sector. In this case we see the public sector taking the lead in an area that the private sector has been slow to accept.

You hear a lot these days about the bad economy. You also hear about companies going into a bunker mentality and hoping to survive rather than proactively managing the situation. Harvard Business Review benchmarked both approaches, and the results clearly favored companies that were proactive in their approach to managing through tough economic conditions.

The bottom line is that you cannot position your company for success if you don’t have a plan that is comprehensive and flexible, and that highlights the gaps in your budget as well as the reserves you have available. Performance management provides the catalyst for implementing such a process and gives you the ability to turn economic crisis into an opportunity, so your business can thrive.

Hopefully, the appointment of Nancy Killefer will have a number benefits:

· It should supercharge and excite those companies currently implementing a performance management process

· It should get the attention of companies considering implementing a performance management solution and serve as a wake-up call for those who don’t have performance management on their radar

· It should shake things up and formalize the performance management title/position for all government agencies (just think of the potential!)

For those who are new to the notion of a chief performance management office or officer, author Bob Paladino defines it in his book, "Five Key Principles of Corporate Performance Management." Included are case studies, key principles and best practices that provide a recipe for successful transformation into a continuous planning environment to create a strategically managed company. And the first step is putting someone in charge:

"The CPM [Corporate Performance Management] Office and Officer are at the center of the five CPM principles. Establishment of this office must be your enterprise’s first step toward formalizing CPM competencies in your organization." — Bob Paladino

If you are interested in learning more, please check out our book offer.