From the Vendor's Point of View: Why 'SaaS Sucks'

No, I haven’t gone over to the dark side and abandoned the Software-as-a-Service (SaaS) movement.

But, I just gave a keynote presentation regarding the state of the SaaS and cloud computing market at SoftLetter’s latest SaaS University in Chicago, where the challenges of developing and delivering successful SaaS solutions were once again brought home in the discussions among the software executives and SaaS professionals attending the event.

Despite it being scheduled on the last day of the quarter and first week of many people’s summer vacation, the event succeeded in attracting about 70 CXOs from a cross-section of established independent software vendors (ISVs) and SaaS start-ups seeking insights about how to succeed in this rapidly growing industry.

Like past SaaS University sessions, the attendees were treated to a variety of tutorials from industry practitioners with a minimum of self-promotion. And, this group of attendees distinguished themselves by asking very pointed questions from the opening bell about specific operational issues associated with the SaaS model.

But, it wasn’t until we got to the working lunch session on the second day of the two-day event that their anxieties came to head. It was during the session focused on the latest accounting rules governing revenue recognition in the SaaS model that frustrations among the established ISV executives began to boil over as they learned that:

• After making significant investments in (re)architecting their applications to be delivered as an ‘on-demand’ solutions,
• After building hosting facilities or selecting a hosting partner to deliver their services,
• After determining how to package, price and promote their solutions,
• After developing a service level agreement (SLA) or comparable legal agreement that clearly outlines the company’s contractual obligations,
• After convincing a committee of IT/business decision-makers to try their solution,
• After determining how much ‘customization’ they can do for specific customers without breaking the common SaaS application and underlying service delivery model,
• After accepting a fraction of the value of application in an initial subscription fee agreement,
• And, accepting all the responsibility for the availability, reliability, security and performance of their SaaS solution…
• The aspiring SaaS vendors then discovered they would only be able to recognize their subscription revenues on a month-to-month basis, decimating their traditional software revenue recognition models.

This harsh reality is what has kept the CXOs of the legacy, on-premise ISVs up at night hoping that the SaaS and cloud computing movement would disappear or be derailed by a major outage that would send customers fleeing back to the comfort of their on-premises software and systems safely hidden behind the firewall. Of course, the opposite has been true and SaaS/cloud computing market growth is accelerating as a result.

No, from a vendor point of view, SaaS isn’t as easy as it looks.

It can be disruptive and painful. And, the rewards can take a while to be realized.

But, unless a major service disruption or ongoing service failures occur, the SaaS/cloud computing services market isn’t going to go away because it offers customers too many business benefits. And, ultimately it’s the customer point of view that really counts.

And, by the way, there are a growing number of SaaS vendors, and established ISVs as well, who are figuring out how to be successful in this deceptively difficult business.

Comments

[Vish Agashe:]

This is a very well written article. I think that the metrics and variable one need to understand and monitor in Saas delivery model are becoming very clear. Any vendor who is not fully aware of these metrics or has not fully bought into the timeline/constraints posed by these metrics is sure to feel the pain of Saas business model (Why Saas model sucks))

1. Cost to serve is a major factor in the lifeline of the business: Cost to serve customers has to be significantly low (compare to the monthly revenue) or has to reduce continuously to its optimal levels over a period first few years (2-3). Architecture and customer engagement details matter the most in this category.
2. Time to break even or profitability: It has taken over 6-7 years for well established vendors to be cash flow positive or breakeven in Saas industry (Look at the history with market leading Saas Vendors like salesforce.com, Netsuite.com or Successfactors.com). It also takes significant capital investments to reach breakeven point (by some counts up to $100 Mil). Vendors need to plan the timeline and capital capacity commensurate with these metrics to be successful.
3. Critical Mass: To achieve business goals in Saas delivery model, one needs to absolutely reach critical mass of customers aggressively in first few years of operation (Ideally first three or so). I compare Saas business model to Fast food chain operations, you need to have critical mass of customers to achieve necessary revenues and profitability. Given the lower price points, one has to absolutely play the number game and achieve the customer numbers.
4. Customer Satisfaction: Saas business model is totally dependent upon customers renewing their service towards the end of the contract. If you cannot be fanatic about customer satisfaction (organizationally), you are in trouble. You need to have organizational culture and religion to make your customers happy and take care of their needs.
There are several other factors which will impact Saas business model (like accounting rules, revenue recognition rules etc…) over days to come, but vendors absolutely need to be aware of and bought into some of the metrics mentioned above to be successful in Saas business model.

Jul 03 11:29 PM

[Luttinger:]

The challenge broght up by Jeff is, I believe, the most critical factor impacting the perspective of the SaaS business. I have written on this extensively in a few blog posts (The coming out of the hybrid SaaS model and The widening gap between SaaS demand and supply), and here’s the essence.
The ability to support both On-demand and On-premise deployment and business models with the same code base was introduced to the market about a year ago by Magic Software and its uniPaaS application platform. Following the trend, recently PaaS provider Longjump announced an On-premise version of their PaaS. There’s even persistent speculation that Force.com would follow suite.
Clearly, on-demand business requires a different business approach than on-premise – but I view it rather as a super-set than a mutually exclusive path. And as we see in the SaaS integration business, many vendors offer a SaaS pricing models to on-premise installs – and doing so for applications should not be much different (assuming customers provide a compliant infrastructure and operate it).
Now, consider the proposition in which the same application platform (and consequently application) supports various deployment modes (single and multi tenancy, Fat, Browser or RIA client). The Client appliance aspect becomes immaterial. A software vendor using such a platform can unify its development and support cycles and have a single cycle of updates and upgrades. The SaaS hosting center (and not necessarily only one) becomes yet another “on premise” customer, hopefully with many more users than a “regular” on premise customer. And customers have the power of choice and can evolve and migrate their software usage in accordance with the evolving business requirements.

Jul 05 05:12 AM

[Phil Simon:]

Interesting thread:

<b>Customer Satisfaction: Saas business model is totally dependent upon customers renewing their service towards the end of the contract. If you cannot be fanatic about customer satisfaction (organizationally), you are in trouble. You need to have organizational culture and religion to make your customers happy and take care of their needs.</b>

I would argue that SaaS vendors might be more responsive to customers for precisely this reason. Traditional vendors get their claws into a client and don't have to worry about being removed as easily. I'm not an expert, but I would think that it would easier for SaaS clients to just abandon ship if they feel neglected or mistreated.

Jul 15 09:58 PM

[Matt Childs:]

Very interesting article. Here is another article very similar, entitled "5 Reasons SaaS Sucks."
tinyurl.com/lfh9v8

Aug 06 09:08 PM