SmoothSpan Blog

My recent post, Taking SaaS Both Ways, started delving into the challenges a conventional (what I call an “Old World”) ISV faces in transitioning to SaaS.  There are many challenges, but two that I focused on are revenue recognition and sales cycles.  The gist of the article is that vendors have to put their customers on either a SaaS or On-premises track fairly early in the sales cycle, yet they won’t know whether they’ll have enough revenue in the quarter (perpetual recognizes all revenue during the quarter, SaaS recognizes it month by month) until late.  This makes the task of transitioning a company from one model to the other extremely difficult and stressful. 

It is possible to do a “cold turkey” transition where the entire product line gets moved to SaaS over a relatively short period in time.  Corporate Travel and Expense Management vendor Concur is the best example of a company I know of that did this.  Their results speak for themselves.  Here is a graph that shows what their sources of revenue were during the period of the shift:

Things were pretty tough for the company during the transition, but they were able to feather out all of the remaining Perpetual License over a period of about 3 years.  Notice how fast the company took off growth-wise after the switch to SaaS: clearly customers liked the new solution better and it was a great decision for Concur.  You can get a sense of this by looking at Concur’s cost in Sales and Marketing needed to acquire $1 of revenue over this period:

Sales and Marketing costs peaked at almost $2.50 of Sales and Marketing needed to acquire $1 of Revenue.  For a perpetual vendor, that’s a going out of business strategy (“We lose money on every unit, but we can make it up in volume!”).  The curve drops precipitously all during the shift to SaaS, ultimately stabilizing at a level well below what the Perpetual business required to stimulate growth.  This just proves once again something I’ve been saying for a while now:  It costs less for SaaS vendors to acquire customers.  This is the reason why Old World ISV’s have to look at the model.  Most of them are facing a similar dilemma to what Concur had.  Most are not going to be able to switch to Oracle’s model of acquiring market share through M&A.

Caught between the rock of needing to move to SaaS because its too hard to grow otherwise and the hard place of revenue recognition and sales cycles, Old World ISV’s need to adopt the concept of Protected Game Preserves.  These are market Sandboxes where ISV’s can wholeheartedly push for SaaS-only solutions without pulling their punches.  Sinclair Schuller has touched briefly on a similar idea over at his blog, but I want to expand on it.  The ideal protected game preserve is not the core business or markets: a switch to SaaS there is the cold turkey approach that can be so painful.  Rather, it is a non-core market that you can afford to give over entirely to SaaS and grow like a new business.

What are some realistic Protected Game Preserves?  Pick any mechanism you’d like to segment the markets:

–  By product:  Introduce some modules that are only available via SaaS.

–  By geography:  If you are a relatively new company, perhaps you are still breaking into new geographies.  Consider doing your localization work on a SaaS-only basis.

–  By vertical:  Many Enterprise product categories require considerable verticalization before they can be utilized in a new market.  Often the verticalization adds new features, changes a lot of terminology, and may require a new UI face on top of the software.  All that makes it an ideal choice to consider for a SaaS-only offering.

–  By size:  What is your average deal size?  How productive are your smallest deals for your bottom line anyway?  What are the chances you can open productive new Small and Medium markets with a SaaS-only offering below a certain deal size threshold?

–  By channel:  Have you been wondering how to get a vibrant VAR channel up and running?  Are you wondering how to partner with some thought leader consultants in your space?  You could set these guys up to resell a SaaS version of your software, perhaps even letting them private label it with a “powered by” badge to keep your brand intact.  In a world where a lot of SaaS vendors are actively taking business from these guys, you’d be a hero for giving something back to them.

By the way, if you’re looking to create a Blue Ocean business, using the Protected Game Preserve strategy you’re more likely to wind up with a SaaS offering in an adjacent market whose waters are much “bluer” than where you are today: an added bonus. 

Let’s play with these ideas a bit more to learn the pros and cons.

Product Game Preserves

Does it work to block off new products as SaaS-only offerings?  I think it does, but you have to make sure there is a good story there.  For example, SaaS excels at things that have to be done in the cloud anyway.  If you have a module that by its nature requires a lot of people outside your customers firewalls to access it, this would be a great one to consider.  Perhaps there is a component that faces you customer’s customers.  If there is a module that involves a lot of collaboration ala Web 2.0, that’s another good candidate in my book.  How about a joint offering with some of the thought leader consultants in your space?  They often have IP that could be packaged up via a SaaS front end connection to your product and made available in that way.

Sinclair calls these “complementary offerings”, and his concern is that they don’t really move your core business to SaaS.  Fair enough, but they sure do get your core customers used to the idea of SaaS.  The more of your modules you move in this way, the more you can orchestrate a relatively seamless transition for the core too because you are in control of the integration points at both sides.  I’m from the camp of any SaaS is better than none, so I’d vote wholeheartedly to go here with any new products you’re building.  It will also telegraph where you’re going with your whole strategy.  Don’t be afraid to get candid with good customers about this behind closed doors.  So long as you leave them a suitably long timeframe and relatively painless transition, they’ll be able to deal with it.  The prospect of putting in some new vendor’s solution can’t be very appetizing anyway if you’re doing a good job for them.  They will welcome the opportunity to partner with you to figure out how to give them what they need while making sure you get what you need out of it as well.

Geographical Game Preserves

This one is doable, but pretty hard.  Geographies do communicate, after all.  The split would have to be across a pretty large region.  Making California SaaS while Texas stays Perpetual makes no sense.  Having Europe or perhaps the double byte ports be SaaS is another story.  Look at this one based on upcoming investments.  If you have to invest in work for a region, maybe it only makes sense to do so on a SaaS basis.  If the region is up and running, it may not make sense to move them to SaaS piecemeal.

Vertical Game Preserves

This one can work out extremely well.  In my prior life, we were paying sales compensation.  One of the verticals, Pharma, was dominated by a SaaS player called Synygy.  It turns out that everyone pays sales comp in that vertical in a way that was extremely well suited to a SaaS model.  Switching a vertical industry off this when they’re used to it is very hard.

When you create a vertical version of your product, there are often a number of features, UI changes, and other tweaks that have to be made.  This is a perfect excuse to try to target SaaS for that vertical.

Game Preserves by Customer Size

Most of the deals Salesforce.com closes are for around 20 seats or so.  They started smaller than that.  SaaS is perhaps the best way to reach out to the Small and Medium-sized markets.  If you are not already doing a big business in these markets, choosing a cutoff point below which you only sell SaaS makes tremendous sense.  It can give you a way to use your brand to help reach a market your existing approach doesn’t work for.  Schuller calls this the “Lite” version, although not exactly, as he seems to feel the Lite version is somehow compromised relative to the mainstream version.  You need to make a real product that is ideal for your market.  Don’t just assume dumbing down the mainstream product is the key to the Small and Medium markets.

The other point I’ll make is you really need to scrutinize your ability to deliver for these smaller markets profitably.  Do you make money on a $100,000 sale?  $50,000?  Do you have a way to sell deals that size efficiently?  Can you generate leads?  What about professional services?  Can you minimize customization for these smaller deals, or is your product an “all or nothing” Big Bang Services install?  Multitenancy will be most important at this scale as well if you want to be able to efficiently serve a lot of small customers.

This model is where you run the most risk if you try to offer “Same old Software as SaaS”.

Channel Game Preserves

The idea here is to relieve a little bit of the confusion by giving channel partners the keys to the SaaS machine and letting them drive it on your behalf.  If you have some great partners, I could see it working.  Unfortunately, you really can’t just hand them the keys.  They will need a lot of help from you to be successful. 

Microsoft is enabling their partners to get into the SaaS business with Microsoft applications as part of their own SaaS strategy.

Final Thoughts 

Starting up a new SaaS business inside a big Old World ISV has got to be one of the most difficult Intrapreneurship plays out there.  Maybe you ought not just restrict yourself to protected game preserves.  Maybe it makes more sense to spin out a small entity to pursue this with single minded focus.  You can always recapture the entity later if it succeeds.  I do believe it is an urgent problem for Old World ISV’s, and most of the ones I talk to realize that, although few would admit it publicly.  The danger is that a SaaS upstart becomes established in your space and makes it even harder to switch.  The time to be thinking about it is before the upstart gets too far along.

And what about the question Ben Kepes raises, which boils down to asking whether we aren’t just nibbling around the edges without progressing the core business?

Here is perhaps an overly pessimistic way of looking at it, but many Old World ISV’s are in a pretty pessimistic frame of mind and rightly so.  If the growth rate on your Old World core business is sufficiently low, does it really matter if you convert existing customers any time soon?  Don’t you have to unlock a new source of growth sooner rather than later anyway?

Alternatively, what do you lose by rocking the boat?  Maintenance revenue and future perpetual sales suffer.  However, maintenance has a long tail.  How often are you shipping new releases?  How often do your customers even want major new releases of On-premises software?  Suppose you complete your next major release and then quietly set to work on the big multitenant SaaS version.  Customers don’t expect another release for maybe 2 or 3 years.  Maintenance releases continue so they keep paying their maintenance.  Your position, as you bring these customers up to speed on you future is that you plan to shift more and more of your business to SaaS, but that they’re welcome to stand pat on their current software as long as they like.  They just shouldn’t expect any major new functionality.  Chances are you have a pretty mature product anyway. 

Ship new SaaS modules and peck away at the installed base while focusing most of you energies on new sales.  If you are an Old World ISV, that’s what you’ve been doing anyway.  The difference is you’ll be building up a recurring revenue base instead of giving away Perpetual Licenses. 

Next installment I want to take a look at how that recurring base can cushion the shock of transition for Old World ISV’s and also at some of the organizational factors you’ll have to overcome for the Protected Game Preserve strategy to work.

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