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I had an opportunity to talk with Steve Singh, CEO of Concur Software about SaaS.  Steve’s company Concur is in the business of automating corporate travel and expenses through SaaS (or On-demand as Steve prefers) offerings his company provides.  Concur is also one of the few that’s successfully undergone a transition from being a conventional vendor selling On-premises to being a pure SaaS vendor.  Did I say succeessful?  Concur is now one of the powerhouse SaaS plays, second perhaps only to Salesforce.com.  Steve’s a real gentleman to talk to, extremely smart, and as you’ll see, he is passionate about what Concur does and about SaaS in general.  He provides a number of key insights that companies thinking about entering the SaaS world should consider.

Below is my transcript on the interview, with my parenthetical remarks (meaning my reaction but not something Steve and I talked about) in parenthesis.  Any mistakes are mine, and any great insights are Steve’s!

What’s your elevator pitch to customers about what Concur does?

Steve:  It’s an amazing opportunity, so good I have to pinch myself sometimes.  We bring innovation to a stagnant market by automating business processes around booking travel and getting expenses reimbursed.  This creates a more efficient supply chain around these areas.  This kind of processing is amazingly expensive.  It costs companies anywhere from $45 to $50 per trip to book travel without automation.  We bring that down to $5.  It costs $40 to $60 (let’s call it $48 on average) to get an expense report reimbursed and we can automate it to do that typically for under $8 a transaction.

In addition to the savings, we eliminate a ton of paper.  We pull data together for mining.  We help companies address governance and SOX issues.  Think about how big a portion of budget travel and expenses can be.  CEO and management have to sign of on the integrity of these transactions.  Concur spends something like 2 1/2% of expenses on Travel and Expense reimbursement.  That’s a big piece of our budget.  And, it’s very hard to govern a process without automating it.

How is your product sold?

Steve:  Our metric is transactions.  Think about it like a cell phone plan.  You get volume discounts with lots of minutes, and incremental minutes cost more.  A volume discount can be thought of as your free minutes.

Concur has 5,000 customers and we’ve sold about 28 million transactions.

Bob:  (This differs from companies like Salesforce.com that charge by the seat month.  It’s an interesting model to consider where the transactions are what the customer is thinking about.   This makes perfect sense for Concur, who want to align their charges with the customer’s perception of savings based on Steve’s economic figures on costs per transaction.)

What crystallized your decision to go SaaS?

Steve:  I would love to tell you there was an epiphany, but we just paid attention to our customers.  Our business and stock were doing well, but, there was a realization that our business served large customers well but nobody else.  This is true for all conventional software companies.  This limited our market and growth.  We wondered how best to solve that problem?

The only real example serving customers of any size and with an accountable 2-way relationship was On-demand.  Licensed software has no accountability.  Our examples were companies like ADP or Paychex.  Technologists think they invented everything, but On-demand has been around for decades.

Bob:  (It’s great that the proximity of ADP to the space helped give Concur an example to learn from.  Others have to stretch further, but now that SaaS is out there, everyone should “get it.”  Steve Singh is not the first SaaS executive I’ve talked to that brought up ADP.  Dave Thompson, former VP of Marketing for WebEx, told me their sales model was formalized around many small transactions because they hired their VP of Sales from ADP and he kept asking how to make WebEx more like ADP.)

Steve:  To make the transition involves a lot of pain.  Only some technology is common, everything else has to be reinvented.  The best example of what can happen if you get it right is to look at Concur vs Extensity.  In March of 2000, both were the same size.  During the downturn, Concur went On-demand and Extensity stayed On-premise.  Extensity was betting the downturn was the source of their problem, that it was just the economy and their growth would resume as soon as the economy turned around.  Fast forward to today and our guidance is almost $35M, Extensity is at $3M.

Bob:  (I wonder sometimes whether the conventional software model has ever really flourished except during bubbles of one kind or another.  Look at Big ERP.  They had the benefit of several major bubble waves:  the rush to switch to client server architectures, the Y2K debacle, and then right on the heels of Y2K was the Internet Bubble.  Would these businesses have grown nearly so large without any of those bubbles?  Maybe SaaS would’ve gotten here sooner.  The choice between the two is a Tortoise (SaaS) versus the Hare (Old School ISV) race.)

Steve:  It’s about driving a long term business, not short term success.  We knew we faced a lot of pain going SaaS, but we wanted to focus on the long-term.

Our first quarter of transition expanded new customers sales faster than ever before.  This was like getting instant feedback that our decision had been a good one, so I’ve never looked back.

What Were Your Biggest Fears About the Transition, And How Did They Turn Out?

Steve:  Our stock cratered and we wondered in the first 6 months.  We replaced all but 2 executives over 9 months.  The only 2 that stayed were the founder and myself.  Nobody else wanted the job.  We had massive changes in sales, support, prod development.  We created a new hosting organization.  We needed a new consulting organization that changed from traditional SI-style consulting to smaller deployments.  Essentially, we started a brand new business.

Our biggest fears:

• We didn’t know if people would buy SaaS.  Even though customers bought payroll that way from ADP, they weren’t buying anything like what we had.  There was no proof they’d buy software as on-demand.  We did do customer research, but it was a bet.  Our first quarter told it all.  We couldn’t have asked for a better response.  This is why SaaS is doing so well.  It’s cost effective.  The vendor is accountable to the customer.  The customer’s life is easier.  And there is a much lower cost structure.
• We also had a fear of whether our people could transition.  They had a lot of choices outside Concur.  It was the height of dot com.  Many wouldn’t take the pain.  We lost a lot of folks who wouldn’t do it.  Some were fine to lose and some it was very painful.

Bob:  (You can hear the pain in Steve’s voice when he talks about how hard it was during the early transition.   It’s awesome that they got instant positive feedback from the market, but you wonder what happens to companies that try a SaaS experiment without really committing and don’t get enough instant feedback?)

What surprised you as you moved into the SaaS market that you didn’t expect?

Steve:  We knew we’d do well in the middle market bringing enterprise class services that were unavailable to that market before.  But we didn’t think global accounts would embrace as quickly as they did.  American Express.  BofA.  Alcoa.  They came early.  They thought we had a much better solution than any other choice, including our own on-premises software. 

The other surprise was how things went with sales.  On-demand delivers reduced cash flow versus perpetual.  Initially, we tried to incent our sales orgs to tackle big accounts perpetually to offset the cash flow issue.  Eventually we made comp completely neutral.  Same commission no matter what the customer buys.  We let the customers decide whether to go SaaS or On-premises.  When the sales comp favored On-premises, it was a 50/50 split.  When we made it neutral it went to 99% On-demand versus 1% after comp change.

Bob: (Having been in the incentive compensation software business, I can’t tell you how powerful compensation is as a tool for aligning sales behaviour.  Steve Singh’s example points this out.  His salespeople where swaying almost half the customers to do something they didn’t really want to do because of the comp plan the sales people were on.  CEO’s take note: the next time you want to turn your supertanker company on a dime, think about using compensation to push that turn through faster!)

Do you think SaaS is an inevitable bridge that every ISV has to cross in some form or fashion?

Steve:  Absolutely.  Look at what’s happened in the last 30 years.  We went from mainframes and sky high transaction costs with few users.  Then we went minis.  Lower costs, more users.  Micro/PC.  Web-based On-demand  is the lowest cost structure and most users yet.  It’s inevitable continuation.

Bob:  (It’s a fascinating way of looking at it.  If Singh is right, there’s a lot more action in store for the SaaS world as we go forward!)

Any other advice for those who want to convert?

Steve:  This is just one guy’s prediction.  I don’t believe large companies can make the conversion.  Forget their genetic code.  How many will take the pain?  Companies won’t reinvent themselves. 

Think of taking a $40B company to On-demand.  The value of the business will go through huge negative change.  It will get crushed.  Cash flow will get crushed.  You have to layoff.  The transition is really hard and its very sudden.

If you’re north of $100M its hard.  Over $1B its impossible.

I’d like to compare businesses that have gone through fundamental shifts in the business model.  Very few have done it.  Intel is one.  But for every Intel there are 100 DECs.

You will see a next generation of leaders that don’t look anything like the last generation.  Keep your eye on the SaaS leaders.  Lots will happen there.

Bob:  (I think Steve is probably right, but we’ll see whether a few don’t decide to walk over the hot coals to SaaS anyway.  The amazing thing about SaaS is that it is better for customers and much worse for the incumbent non-SaaS ISV’s.  This is what makes it such a disruptive new business model.  It literally has the potential to completely change the landscape.)

Next?

Check out Part 2, where Steve gives his view on Salesforce, their Force platform, SAP’s ByDesign and acquisition strategy for SaaS companies,.  Part 3 discusses Sales and Marketing for SaaS companies as well as some observations Singh makes on future trends in the SaaS world.  Be sure to click the “subscribe” link at the top left of the blog page so  you don’t miss out on these future posts!

And special thanks to Steve Singh for taking so much time to talk with me for this interview.

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To Seth Godin’s point, Steve Singh is the guy that said “follow me” at Concur and converted the company from Seth’s green curve to the blue curve.

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