Why SaaS will become the preferred solution over On Premise.

I just answered a linkedin question about what will become the predominant solution SaaS or On Premise. I thought it worth posting about.

Firstly lets have a look at why some organizations may have a natural resistance towards SaaS. An Article in CIO magazine lists a number of these reasons which I summarize here.

1. Service levels cannot be guaranteed by SaaS vendor
2. Lack of configurability
3. Sharing functionality with hundreds of potential competitors
4. Elimination of CIO role

I will add a couple more here

1. Hosting data outside of firewall.
2. Loss of control due to business units running "rogue" IT projects using SaaS.

Lets take a look at why these 'inhibitors' become non-issues for SaaS.

1. Firstly SaaS Service levels. Gone are the days where a startup SaaS vendor will try to host their own service. This is not a core competency, as such SaaS vendors follow their own value proposition ie find an expert to handle Hosting and service levels. Companies such as Rackspace and Opsource will handle this side of the business with guaranteed up times.
2. Lack of configurability. SaaS obviously enables you to implement a system which can be used in a very short amount of time, bypassing on premise challenges such as server provisioning and software installation. However SaaS does not mean the end of configuration. Salesforce.com as an example provides a very flexibility platform for building your own custom objects and UI, as do many other vendors. This enables you to model the 20% of your business process which is unique to you.
3. Sharing functionality with other organizations. This works both ways, sure you may have had an idea which the SaaS vendor has taken and made available to others. But this means you too will benefit from other organization's ideas. Furthermore the uniqueness of your business process is part of the configuration model mentioned in item 2 above, it is not part of the standard functionality of the multi-tenant single instance.
4. The CIO role will not be eliminated. In fact I see it going the other way, where it becomes even more a strategic organizational role. The CIO must make decisions on what is SaaS and what is on premise, they also need to determine how these systems integrate and how information is conveyed within the organization.
5. Data outside of the firewall. This continues to be a major topic in the news. But as the trend of utilizing data center experts such as Opsource and Rackspace increases then the risk continues to reduce, as these companies' entire success hinges on security and reliability.
6. Rogue Projects. Many time business units within an organization will look to a SaaS solution as they have been told by IT that their needs cannot be serviced in a timely manner internally. As SaaS becomes more widely accepted and recognized by Internal IT not as a threat but as an asset then SaaS projects will not be seen as rogue projects but rather an IT recommended solution. This will enable CIOs to adopt SaaS in a more structured and integrated approach.

The current generation of CIOs may have these inhibitions towards SaaS and will take time for these 'fears' to be overcome.

However what ensures the longevity of SaaS is the next group of CIO's who are in college or have recently joined the workforce. This crop will see Web 2.0 as a totally natural way of doing business as its what they do in their personal lives.
Storing files and documents, in Google, in Microsoft Live, social networking, wikis all are ingrained in this new generation and SaaS will become the obvious choice.

Is SaaS a profitable business model?

Read a blog post today by Charles Fitzgerald.

I'm simplifying a little here but Charles basically discusses the challenge of profitability when there are high costs of acquisition and of retention which then extends the time required to recoup the costs from the subscription revenue. Salesforce.com and NetSuite are used as case studies, along with examples of the cost of sales cycles and their balance sheet numbers.

The temptation in this scenario is therefore to focus on enterprise sales, the higher user counts would then offset the cost of sales. Now this makes sound business sense looking at pure financials.

The problem I have with a purely Enterprise strategy is that it leaves the SMB market underserved. This got me thinking.

Back when I was involved in selling and implementing on premise or ASP hosted Life Science CRM we had the sample problem, the cost of selling and in fact the cost of implementation were the same whether it was a 30 user site or a 2000 user site so we much preferred working on the larger sales opportunities, so its something that isn't new and unique to SaaS. In fact in those days we didn't get full payment until implementation was complete, accepted and rolled out, so it could take months to recoup the cost anyway.

However lets take a look at the breakeven equation, as per above you could go for the larger user counts (Enterprise) to offset the acquisition costs OR you could look at making the cost of sales so low that its inconsequential.
(you could also try upping your subscription prices but that would make you vulnerable to Competitor pricing)

The question then becomes ...
Why would you attempt to sell to SMB's the same way you would as Enterprise? .

Firstly, what is the cost of sale comprised of:
1. Sales Rep Time and Remuneration
3. Salaries of Operations people involved in the sale
4. Travel?
5. Opportunity Costs

The greater the time a sales rep spends on one sale means less time available for other deals, which means you are forced to increase the size of your sales force to handle leads. If your product is overly complicated then you need a larger team of presales engineers for demo purposes.

It seems to me then its really the people involved which incurs the cost.
Rep face time in the Enterprise world is about relationship building,
A successful SaaS selling model is different. Remember, SaaS is a state of mind.
You're evangelizing a way of purchasing and using software as much as a product.
Which means a successful SaaS sales cycle needs:

1. No Sales Rep involved during early and middle stages of sales cycle.
2. No technical people required to demo and setup until the close stage, which is possible if your product is self demoable and user can sign up for evaluation use online.
3. An application which can be provisioned and configured by the customer themselves, this being a basic tenet of what a SaaS system needs to provide anyway.

For item 1, what do you in lieu of rep to prospect face time? Viral marketing is one way - effective use of online networks with vocal customers evangelizing your product. It's all about building up trust. And if we've seen one consistent thing on the web, consumers trust other consumer's referrals more than anything.

To close the deal, you are going to obviously need some interaction, but that doesn't need to be time intensive, could be a couple of phone calls and a WebEx/Gotomeeting presentation.

Is SaaS a profitable business model? If you have built your product well, its easy to use, is self provisioning and self configurable and solves business problems, then the answer is Yes.

'Webifying' the Desktop

I have been reading some interesting blogs lately.

Treb Ryan
Bob Warfield

Treb makes the prediction that "All applications will be web applications".
Somebody like myself who is exclusively involved in SaaS will obviously agree with that point, although I would amend it to be "All applications will have a web component to them, will be deployed over the web and will have a shared information repository on the web"

Bob makes some interesting and valid observations about the future of the desktop and how it can survive in the web X.0 world.

What this got me thinking about was "what is good about the desktop which cannot be currently emulated in the browser".

Despite all the fantastic innovation that Web Developers have achieved, they still fall short of the user experience which the desktop can provide be it Vista, Mac OS or Linux. This could be due to the boundaries of the browser.

A lot of talk is about Mashups right now, a good thing.

However wouldn't it also be cool if on your desktop you had your dashboard from your SaaS BI tool displayed in one corner, your list of Tasks from your SaaS Scheduling app in another, a list of contacts from your SaaS CRM tool and then your Question and Answers from Linkedin at the bottom. You could then drag and drop items from one SaaS app to another. All the processing of data would be handled on the hosted app side and you are simply rendering UI results on your desktop.

There is still huge potential in browser apps but the desktop could still provide some interesting opportunities.

Web 2.0 again!! and Social Networking.

I actually read a lot of the questions coming through on linkedin.com via igoogle.
As we discussed in some of my earlier posts the term Web 2.0 appears to have different definitions depending on who you talk to.

On linkedin, everyone is talking about Social Networking and Collaboration and defining this as web 2.0. (Everything is X 2.0 nowadays as if by putting the number 2 in front of a term we have suddenly and miraculously discovered a new technology)

So now Web 2.0 is social networking which also includes collaborative tools in the business environment.I am an avid user and supporter of these types of tools being it a wiki, blog or networking sites like
linkedin.com

Less focus is placed on line of business applications being transformed by Web 2.0 in particular SaaS. My interest is obviously biased towards this, but I think the success of Web 2.0 collaboration tools within a business organization actually hinges on the adoption of a SaaS mindset first.

By having these SaaS business tools in place first, it gives context and sensible subject areas to Social Networking and colloboration.

A good example I think is Life Science CRM. I read an excellent post today
Scott Monty

Pfizer is partnering with a social networking site and will get access to the thousands of doctors who network there. Now this is something that the Sales reps would love to analyze and review for the zipcodes in their territories and the best place for this would be in their CRM system. Not an easy task if you aren't using a SaaS application. By having it in CRM, it structures what is essentially unstructured information. I can picture one day a Life Science SaaS CRM solution which has a social networking and blog portal for doctors as part of its feature set.
(Although you have to be in compliance with all FDA regulatory requirements.)

SaaS Product Pricing

Found an interesting question in LinkedIn a couple of days ago. Someone in my network asked about how they should price their SaaS offering to customers.
All sorts of complex scenarios were discussed and extra charges for infrastructure was suggested.

Frankly, IMHO that type of talk misses the whole point of why SaaS is attractive to many organizations. SaaS is not about technology or the platform, its all about a service that you pay for in a regular cycle. As a potential customer, If you get charged for infrastructure or server hosting, thats not SaaS, its an an additional unnecessary cost which you were trying to avoid in the first place with SaaS.

You look at SaaS because you don't want the higher cost of ownership of buying servers, software licenses and the additional cost of setup.

A secure and stable hosted environment is a given and a customer should not be expected to pay for that as an extra cost.

With a SaaS solution, initial provisioning should be transparent to you and pricing should be simple, a single per user monthly cost possibly on an annual renewal.

Excellent BLOG -Challenges CEO/CTOs face

I found an excellent BLOG post Jason Calacanis about the challenges CEO/CTO relationships face in startups. It was almost like reading an autobiography of my earlier days.

Seven Steps to successful user adoption of your Software as a Service Solution

We've been busy provisioning a whole bunch of new customers in my role at Forcelogix.
Only now have I had time to sit back and look at what we have done in the last few years to get to where we are.

Forcelogix is not my first "foray" into Software as a Service Solutions, but when we started up Forcelogix, it was at a time where Salesforce.com was truly setting (and still is) the benchmark in this space. As such, customer expectations and knowledge were far greater than my last foray into On Demand services.

As we have been acquiring new customers, it has been a learning curve for us as an organization. We have our own Product roadmap of course but in implementing our product for these new customers it has "encouraged" us to fasttrack some of the items on this roadmap. Without successfully doing so, we would not have closed the deals that we have now and we would not have retained the customers we already have. A successful ongoing SAAS business is all about Monthly Recurring Revenue and without successful user adoption you will fail miserably in this area.

As such I decided to write up here and provide to you the list of "Must Haves" you will need to implement if you are looking at starting up a successful Software as a Service Company. Hopefully this will be useful to some of you out there.

1. Agile Development Methodology.
Your Dev Team must adopt an Agile Development Approach to delivering product.
Software as a Service Development is all about low cost, high quality and speed of delivery.
You cannot afford to adopt a bloated and slow approach to delivering features.
Users will identify features and issues that will become showstoppers unless you can resolve quickly.
The ability to deliver new features quickly will also help retain user interest in your product.

2. Dynamic Localization.
If you have any hope at all of selling your product to Multi-National Companies, you need to provide a web based mechanism for your customer to localize to their language and culture. Localization cannot be the traditional Development function. Each customer and country has their own terminology and set of idiomatic expressions. For successful user adoption of your product, you need to be able to let the customer decide how to translate your product.

3. Offline (Occasionally Connected) Module.
Without an offline module, you will not get far in the B2B On Demand Space.
Users will always want to have the option of using your product without an Internet connection.

4. Reliability.
Not much needs to be said about this. If users cannot access your system they will stop using it. Just make sure you have plenty of redundancy in your data center, and detailed recovery plans which have been tested.

5. Ease of Use and User Experience.
Users have very little patience, and if they are required to read a "book" on how to you use your product and attend 3 day training courses you will not have good user adoption. A 2-3 hour Web conference should be sufficient. User Experience goes hand in hand with this. A non intuitive application is doomed to failure. A simple UI along with good performance will go a long way in building up user adoption. AJAX can help with the "perception" of speed in your application.

6. Measure.
Provide a convenient way for the "Client" Administrator to monitor usage.
Implement a usage report in the "Admin" view of your product. You need to identify patterns of low usage and act on them quickly. You may see such things as lack of communication, "incorrect data" are the cause of some users not using the product.

7. Communication
Communicate regularly with your key contacts. Make sure you are always up to date on customer perception and what is happening in the customer organization. Personnel Changes, IT Policy changes, Business process change can all impact user adoption and you need to spot these early.


I hope you find this useful.